When you stress test lenders, why aren’t there any stress tests scenarios for borrowers?

Sir, Caroline Binham writes that “EBA outlines stress test scenarios for lenders” February 25.

And my immediate reaction is to remind you of that those stress tests do not include, in any way shape or form, an analysis about how banks could be stressing the real economy, with an inefficient allocation of bank credit.

Again, for umpteenth time, I have always argued that the number one social function of banks is not necessarily that of repaying whatever it owes, but allocating their credit as efficiently as possible to the real economy.

But the credit risk weighted capital requirements have made it impossible for banks to fulfill that social duty.

Dare ask: How many millions of small bank loans to SMEs and entrepreneurs, has the Basel Committee’s regulations impeded worldwide?

And so any sensible stress test of banks should not only consider what is on banks’ balance sheets but also what is absent.

And those comprehensive tests would evidence that banks are no longer finance the risky future, but only refinance the safer past.

Though I admit that conclusion might be to stressful for the great distorters, the bank regulators, to bear. 

@PerKurowski ©

IMF, the “bold” action needed is not for “to contain risk”, but for to contain bank regulators’ silly risk aversion.

Sir, I refer to Shawn Donnan’s “IMF urges top economies to join forces in growth push” February 25.

In it IMF is quoted warning: “global market turbulence is starting to hurt the real economy…These developments point to higher risks of a derailed recovery, at a moment when the global economy is highly vulnerable to adverse shocks”

But again, as has been the case for the last decade, IMF says not one word that what really derailed the economy, and now impedes it from getting back on rails, were the distortions in the allocation of credit to the real economy, produced by the risk weighted capital requirements for banks.

And IMF opines: “The global economy needs bold multilateral actions to boost growth and contain risk.”

NO! The “bold” action most needed is not to “contain risk” but to get rid of that silly risk aversion that, around the world, over the last decade, has perhaps impeded millions of bank loans to SMEs and entrepreneurs. 

@PerKurowski ©

How could it be in the interest of any bank regulators to have CoCos with unclear and haphazard conversion terms?

Sir, I refer to Thomas Hale’s, Martin Arnold’s and Laura Noonan’s discussion on the regulatory uncertainty that exists, “Coco trade seeks to emerge from dark period” February 24.

I am amazed. If I was a bank regulator and I had signaled that one way for banks to cover for the capital regulators required were the CoCo’s, I would want these to be as clear and transparent as possible. That not only to make sure banks could raise these funds in the most competitive terms, but also to be sure I covered my own share of responsibility in the disclosure process.

Something must have gone seriously wrong if there is still such huge regulatory uncertainty. I mean I could not for a second believe that any regulator would want to withhold such information on purpose.

In April 2014 I sent you a letter that asked “Can bank regulators keep silence on the conversion to equity probabilities of cocos?" 

In it I wrote: “Do regulators have any moral or formal duty to reveal to any interested buyers of cocos if they suspect the possibilities of these having to be converted into bank equity being very high? I say this because if so, and if they keep silent on it, that would make them sort of accomplices of bankers. Would it not?... Of course banks need capital, lots of it, but tricking investors into it, does not seem like the right way for getting it.”

In May 2014 I wrote you a letter asking “Is it ok for a regulator, like EBA, to withhold information from 'experienced investors'?"

In it I asked “What would be the legal responsibility of bank regulators, towards any coco-bond investors, if they withheld important information with respect to the possibilities of those bonds being converted into bank equity?”... and also:“Britain´s regulator, the Financial Conduct Authority, has said it plans to consult on new rules to ensure cocos are only marketed to experienced investors…Would that imply that a regulator can withhold important information from “experienced investors”? If so, just in case, for the record, I have no knowledge about investments whatsoever.

And then in August 2014 I wrote you a letter that alerted: “The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.”

But then again regulators might also have decided it was better to go and fly a kite J

@PerKurowski ©

Martin Wolf, much more than helicopter droppings, we need regulators who understand what banks are for

Sir, I refer to Martin Wolf’s “The helicopter drops might not be far away”, February 24.

As you well know I suffer a self-confessed obsession with denouncing the distortion that the credit risk weighted capital requirements for banks produce in the allocation of credit to the real economy. Martin Wolf, though he does not confess it, suffers a similar obsession, with ignoring that distortion.

Here Wolf refers again to “the major governments are able to borrow at zero or even negative real interest rates, long term”. And Wolf refuses to notice that sovereigns, with the low capital requirements they generate for the banks, have been declared by regulators to be preferential bank borrowers. And that is especially important when bank equity is scarce.

If you force the banks to hold the same capital against sovereigns than what they are required to hold against loans to SMEs and entrepreneurs, then you would know what the non-subsidized borrowing rates of governments really are.

Or if you allow the banks to hold the same capital against loans to SMEs and entrepreneurs than what they are required to hold against sovereigns and other preferential borrowers, then you would see investments increase. And that without increasing significantly the risk of banks, since loans to “risky” SMEs and entrepreneurs never cause major crises.

Wolf refers to the “lunatic…austerity obsession”. No! What’s really lunatic is the regulators’ risk weighing obsession… as if they were Gods.

Wolf should ask the following, for instance to Adair Turner whom he references:

How many bank loans to SMEs and entrepreneurs have not been awarded in America and Europe during the last decade only because of the risk weighted capital requirements for banks, ten thousands, hundred thousands, millions?

And so of course we might need helicopter money, that at least would be much better than QEs’ money redirectioned by bank regulators; but more, much more than that, we urgently need bank regulators who understand the concept of: “A ship in harbor is safe, but that is not what ships are for.” (John Augustus Shedd, 1850-1926)

PS. And that would also be the best way to dent inequality: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.” J.K. Galbraith’s “Money: Whence it came where it went” 1975

@PerKurowski ©

Every Brexit needs its Brentrance.

Sir, Janan Ganesh writes: “Britons are being invited to exchange the lived reality of EU membership for a nebulous exit, envisaged by its most popular advocate as a way of gaining leverage over Brussels for a deeper revision of membership terms.” “Boris mania exposes an overexcited political class” February 23

And Gideon Rachman writes: “Mr Johnson’s decision to campaign for Brexit might put him on the right side of history, but only in the first and narrowest sense of foreseeing the direction of events... A modern Churchill, which is what Boris clearly aspires to be, would immediately understand that Britain’s decision about whether to stay in the EU has to be seen as part of a wider global picture.” “Johnson has failed the Churchill test".

This is so much reminds me of the problem in my homeland Venezuela. There too many are pointing towards an escape door, without indicating at all to what entrance that door leads.

If Britain wants to leave EU, something that indeed sounds a bit adventurous to say the least, then it should at least begin to think about the morning after.

And this reminds me that way back, in the last century, in 1999, I wrote an Op-Ed titled “A New English Language Empire” It might provide for a timely read

@PerKurowski ©

How many small bank loans to SMEs and entrepreneurs has Basel Committee’s regulations hindered? Millions?

Sir, Shawn Donnan reports that in his annual economic report to Congress president Obama portrayed an American economy in relatively rude health after weathering one of the most brutal crises in its history. But Obama also acknowledged rising inequality, and that “a lot of Americans feel anxious”, blaming that on an economy that thanks to technological advances had been “changing in profound ways, starting long before the Great Recession”. “Obama rejects allegations economy is on the slide” February 23.

I would suggest to Mr. Obama he poses the following question to some economist at universities and at the Federal Reserve: 

How many bank loans to SMEs and entrepreneurs have not been awarded in America and Europe the last decade because of the risk weighted capital requirements for banks, ten thousands, hundred thousands, millions? I expect their answer to be frightening.

One way to obtain that number would be to look at how many of these loans were on the balance sheets of banks pre Basel II and how many are to be found today.

There is no way in hell America and Europe can regain sturdy and sustainable economic growth with bank regulators who distort the allocation of bank credit to the real economy with a silly and dangerous credit risk aversion.

Ben McLannahan in “US lenders blast proposed capital buffer rules”, reports on the ongoing discussions about rules on banks’ “total loss absorbing capacity” (TLAC). There he writes: “The top lobby groups for banks in the US have blasted proposals to make them build bigger capital buffers against losses, saying the “excessive” requirements could restrict the flow of credit to the world’s biggest economy.”

But, no matter at what percentage they are set, the required total loss absorbing capacity is still based on risk weighted assets (RWAs). And that means banks must hold more TLAC for assets considered as risky than for assets considered as safe.

And so that means those capital requirements especially restrict the flow of credit to those perceived as “risky”, the SMEs and entrepreneurs.

In this world were lobbying has sadly become a part of the government process, how sad it is that “The Risky” have no powerful lobbyist on their side.

The first arguments such a lobbyist could produce is to inform regulators about the fact that SMEs and entrepreneurs, precisely because they are perceived as risky, already count with less and more expensive access to bank credit, and so they never ever set of major bank crises.

And to address the inequality issue they could cite J.K. Galbraith’s “Money: Whence it came where it went” 1975 with: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

“A ship in harbor is safe, but that is not what ships are for.” (John Augustus Shedd, 1850-1926) America, Europe, the World, what goes for ships goes for banks too!

America, Europe, the World, for the sake of next generations, allow your banks to finance the risky future and not only be refinancing the safer past!

@PerKurowski ©

The most important risk with banks will most probably be totally ignored again in the stress tests

Sir, Ben McLannahan reports on the Federal Reserve stress tests of the biggest US banks “designed to assess whether banks have enough loss-absorbing capital to keep trading through a shock to the system similar to the collapse of investment bank Lehman Brothers in 2008.” “US banks face tougher stress tests” February 22.

Again those tests will probably totally ignore the biggest risk with banks, that of these not allocating credit efficiently to the real economy.

In Yuval Noah Harari’s “Sapiens: A brief history of humankind” we read:

Over the last few years, [central]-banks and governments have been frenziedly printing money. Everybody is terrified that the current economic crisis may stop the growth of the economy. So they are creating trillions of dollars, euros and yens out of thin air, pumping cheap credit into the system, and hoping that the scientists, technicians and engineers will manage to come up with something really big, before the bubble bursts…

Everything depends on the people in the labs. New discoveries in fields such as biotechnology and nanotechnology could create entire new industries, whose profits could back the trillions of make believe money that the banks and governments have created since 2008. If the labs do not fulfill these expectations before the bubble bursts, we are heading towards very rough times.

And substitute there “the real economy with its SMEs and entrepreneurs” for “the labs”. 

Since banks are allowed to leverage their equity, and the support they receive from the society, many times more with assets perceived as safe than with assets perceived as risky; and banks therefore earn higher expected risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky, banks have no incentives to lend to “risky” SMEs and entrepreneurs. And much less so when most banks suffer a scarcity of capital.

And central bankers should dare to ask themselves: How many millions of small bank loans to SMEs and entrepreneurs, has the Basel Committee’s regulations impeded?

And so any sensible stress test of banks should not only consider what is on banks’ balance sheets but also what is absent.

And regulators should opine on whether banks are fulfilling their number one social purpose, which is that of allocating credit efficiently to the real economy.

But because banks no longer finance the risky future, and only refinance the safer past, that might be just to stressful for the great distorters.

@PerKurowski ©

Yes to a tax on carbon. But no to hidden subsidies or it going to tax revenues profiteers/distorters

I come from an oil extracting country, Venezuela, and so of course I should be horrified of a carbon tax that, one way or another, would affect the value we get from liquidating a barrel of non renewable oil forever.

But I am not, because in order to act responsibly towards the planet that our children will inherit, I accept the need to impose some restrictions on its use.

And I therefore entirely agree with Tim Harford in that “We can’t rely on high oil and coal prices to discourage consumption: the world needs — as it has needed for decades — a credible, internationally co-ordinated tax on carbon.” “Cheap oil and its consequences”, December 20.

But how the revenues produced from that tax should be handled, is an issue of utmost importance.

Let me start with the hardest concept to understand for all who do not posses oil on their own. The reason why you can charge a very high tax at the pump is the very high convenience value consumers give to petrol/gas. And so it is not really correct for a country that did not give up that non-renewable resource, to, by means of taxes, capture all that rent for its own benefit.

In some ways it would be like if oil extracting countries imposed a tax on the consumption on all foreign products that have especial attractiveness to their local consumers… a kind of luxury tax directed solely to the luxuries provided by others. What would for instance France say about a tax that in an oil extracting country they taxed French wines valued over a certain price range?

And we are not talking about peanuts. As I wrote in a letter published in FT in 2003 at that time, before the big increase in oil prices, for every $1 received by the one supplying the petrol, the European taxman got $4. And sometimes at that time, like in Germany and Spain, much of those tax revenues were even used to subsidize coal, like rubbing salt into the wound, and this even while the petrol tax was justified in environmental terms.

So how do I suggest the carbon tax revenues are applied? I have no defined idea about it, except wanting to avoid that some carbons get a better treatment than others, and that all those revenues fall into the hands of vulgar tax revenues profiteers or distorters.

What if all carbon taxes collected in the world were put in a big pot and thereafter just distributed in equal shares to all citizens of the world? That could both dent existing world inequalities (a stimulus for the economy), and increase the general interest in the fight for a better environment.

@PerKurowski ©

The regulators, by helping bankers have their wet dreams come true, worsened our young’s future perspectives.

Sir, Martin Sandbu writes: “The giants of the US asset management industry have held secret meetings since August to discuss how to push company executives to make more long-term decisions. Participants included veteran investor Warren Buffett, JPMorgan CEO Jamie Dimon, and leaders from Blackrock, Fidelity and other major managed fund providers.”, “From boardroom to Shangri-La”, February 20.

And Sandbu refers to: “Negative externality” is the economist’s term for the harm a company’s activities cause to the world around it… lobbying for government rules that privilege one sector over others may, in the longer term, make the rest of the economy less efficient. Indeed and there are no better examples of that that current bank regulations.

Mark Twain is rumored to have said: “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.”

And with their risk weighted capital requirements of banks, the current regulators added “A banker is a fellow authorized to leverage equity immensely much more when lending out his umbrella when the sun is shining, than when it seems it looks like it could rain.”

And with that banks have now realized their wet dreams of earning much higher risk adjusted returns on equity when lending to the safe than when lending to the risky, like SMEs and entrepreneurs; and with that banks no longer finance the risky future, they only refinance the safer past.

And all for nothing since major crises are never ever the result of excessive exposures to something ex ante perceived as risky, always of something ex ante perceived as safe but that ex post turned out to be risky.

Sandbu also refers to that Yngve Slyngstad, the head of Norges Bank Investment Management stated that “Norway’s sovereign wealth fund demands that boards pay particular attention to climate change, water management and child labour”

Though I generally believe it arrogant and dangerous to intervene in the markets, if Mr Slyngstad really wanted to help, he should then better support purpose weighted capital requirements for banks. Those would allow for higher risk adjusted returns on bank equity when financing something society finds has special merits… like water management and creating jobs for our young ones.

@PerKurowski ©

The regulators’ search for financial stability has distorted the allocation of bank credit to the real economy.

Sir, you hold “G20 governments would do well to recognize that financial instability can rapidly translate into trouble for the real economy.” “Central banks alone cannot conjure growth” February 20

Sir, you should know by now the regulators’ search for financial stability, has already created much trouble for real economy.

You quote Zhou Xiaochuan, governor of the People’s Bank of China, with “The central bank is neither God nor a magician who can turn uncertainties into certainties.”

The correct reply to that would be: So why then do central banks, as regulators, act like God or magicians arrogantly imposing their besserwisser founded credit risk weighted capital requirements for banks?

If you allow banks to leverage more their equity (and the support they receive from society/taxpayers) with assets ex ante perceived as safe, than with assets perceived as risky; then what is perceived or deemed to be “safe” will produce higher risk adjusted returns on equity than what is “risky”.

And anyone who does not understand how that distorts the allocation of bank credit on Main Street, has never walked on Main Street; has never seen how difficult it is for SMEs and entrepreneurs to access bank credit even without the regulators making that harder for them.

And if you do not understand how useless such distortion is, because major bank crises never ever result from excessive exposures to something ex ante perceived as risky, then you have not read financial history.

Who authorized bank regulators to decide on the allocation of bank credit to the real economy?

Or is it really so bad that banks regulators are not even aware of that they distort the allocation of bank credit to the real economy?

PS. 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”

@PerKurowski ©

For credit we now might need shadow-banks. For intellectual capital free from network incest, do we need shadow-universities?

Sir, Martin Wolf writes: “In its origins and still today, a university is a special institution: a community of teachers and scholars. Its purpose is to generate and impart understanding, from generation to generation. The university is a glory of our civilization.” “Running a university is not like selling baked beans”, February 19

Indeed but from this perspective does it really follow that “Four of the 10 top-rated universities in the world, five of the top 20 and 10 of the top 50 are British” makes UK a “superpower” in higher education? Could not the truth be that in much all universities everywhere are failing and need to be rethought?

For instance, how much of our universities is being used not to promote understanding but to self-promote those who understand? Current research clearly seems to suffer from cronyism: “I Reference You and You Reference Me”? And, excessive cross-referencing within small mutual admiration networks cannot produce much good.

Also, what university in the UK, or anywhere else for that matter, have really debated something so fundamentally important as bank regulations that could be fatally distorting the allocation of bank credit to the real economy? And where is the university that has questioned the whole (nutty) concept of a zero risk weight for the sovereign and a 100 percent risk weight for the private sector?

The Department for Business, Innovation and Skills, in a discussion document titled “Fulfilling our Potential”, presents the idea to “open up the [university] sector to greater competition from new high-quality providers”. And Martin Wolf expresses some well-founded concerns about that.

Banks are currently, because of regulatory risk-aversion, kept away from fulfilling adequately their most fundamental role in the economy. In this respect I have often said that our next generations might find among some shadow-banks their best chance to finance the risky future.

And so, in the same vein, who knows if not our best chances “to generate and impart understanding, from generation to generation” could be found among some new formal university competitors, or even among some shadow-universities?

@PerKurowski ©

Does BoE’s core mission not include assuring bank credit is allocated as efficiently as possible to the real economy?

Sir, I refer to the letter written by Andrew Bailey and Sir Jon Cunliffe of the Bank of England titled “Proposals designed to fulfill BoE’s core mission”.

“They write “BoE’s proposals about the appropriate capital requirements for the UK’s banks are the product of two years of careful reflection and stress-testing, and are designed to fulfil our core mission of making the banking system safe and sound.”

But then we read about equity requirements expressed as percentages of “risk-weighted assets” and I must again ask the following:

Is not also part of the core mission of BoE assuring that bank credit is allocated as efficiently as possible to the real economy? I ask this because risk weighted capital requirements, by allowing banks to earn higher risk adjusted returns on equity on assets ex ante perceived as safe than on risky assets, distorts horrendously the allocation of bank credit to the real economy.

And by the way, by distorting that credit allocation they will make the real economy unsound and thereby, sooner or later, also threaten the safety of the banking system.

And by the way, just as an aide memoire, I remind them of that no major bank crisis ever result from what is ex ante perceived as risky, these are always the consequences of excessive exposure to something that ex ante was perceived as safe but that ex post turned out to be risky.

@PerKurowski ©

The blindness of Financial Times (FT) to the most dangerous bank regulation blunder of all times is mindboggling

Sir I refer to your “Simplicity is the key to a resilient banking regime” February 17.

Therein you write about the need to “ensure that lenders have clear capacity, primarily in the form of equity capital, to absorb large losses if a crisis hits. Of course, this is a balancing act: regulators must weigh the benefits of more resilient banks against the higher costs of equity funding, which are likely to result in slightly higher borrowing costs in the real economy, constraining household and business borrowing.”

There it is, right in front of you. You accept that the level of bank equity carries costs, but yet you refuse to acknowledge that different levels of required equity for different borrowers, those which result from the risk weighted capital requirements, distorts the allocation of bank credit to the real economy. Why?

Also when you specifically mention that more bank capital would constrain “household and business borrowing.” you are ignoring that these “risky” borrowers are already much more constrained by the regulatory advantages awarded to other “safe” borrowers like sovereigns, the AAArisktocracy and housing finance.

You are absolutely correct in that “Setting the level of equity banks should hold is a judgment call” but, setting different levels of equity based on perceived risks already cleared for by banks, is a call that just shows a total lack of judgment.

And, to top it up, the current risk weighted capital requirements for banks only guarantee that when what ex ante has been perceived as very safe ex post turns out to be very risky, that banks will stand there very naked because of having especially little to cover themselves up with.

PS. Sir I don’t refer here to the discussion between John Vickers and Bank of England (Mark Carney), since for all practical purposes they are just as blind as you Sir.

@PerKurowski ©

It would be helpful if Martin Wolf finally realizes the dangers the risk weighted capital requirements for banks pose.

Sir, now, more than 12 years after Basel II was approved Martin Wolf writes: “If one ignores the vanishing trick of risk-weighting, the true leverage of many large banks remains at more than 20 to one.” “Banks are weak links in the economic chain” February 17.

But, of course, the real question though is, why have regulators ignored the dangers “the vanishing trick of risk-weighting” poses? Not only can that risk weighting that was envisioned to provide better and more comparable information on banks confound the markets more; it also provides banks with an versatile instrument to game the regulations; and, worst of all, it distorts the allocation of bank credit to the economy.

On that last, the distortion, Wolf might at long last begin to wake up as he writes: “Banks are highly leveraged plays on economies. If economies are sick, banks are likely to be sicker.” So now let us hope that from that he could deduct that the way bank credit is allocated to the real economy carries real significance to the health of the economies and the banks.

And then, Hallelujah, Martin Wolf finally accepts “that banks are exposed to almost everything”. That should allow him to understand the idiocy of re-weighing for basically the only risk that banks with interest rates and amounts of exposure already clear for, while leaving the whole universe of other risks a bank faces out of the regulatory equation.

Sir, as you well know by now I will with much interest follow where Wolf goes to now because it would of course be very useful if the leading economic commentator of the Financial Times opened his eyes to what has and is really happening with our banks.

Currently, by regulators allowing banks to earn higher risk adjusted returns on equity financing on what is perceived or deemed as safe than on what is perceived as risky, banks have stopped financing the riskier future and settled on refinancing the safer past… and that cannot be good for anyone, least so for our children and grandchildren.

And of course, all for nothing because major bank crisis never ever result from excessive exposures to something ex ante perceived as risky.

@PerKurowski ©

ECB, Mario Draghi, before bank regulation distortions are eliminated, should not be allowed to waste any more in QEs

Sir, James Shotter reports that Mario Draghi, “the ECB president, said the central bank would pay close attention to the impact of the recent falls in oil and commodities prices, as well as the ability of banks to pass on the ECB’s monetary policy” “Draghi’s speech hints at further stimulus measures for the Eurozone” February 16.

Mario Draghi, as the former chair of the Financial Stability Board must know that the risk weighted capital requirements for banks, dramatically distorts the allocation of bank credit to the real economy, which impedes banks to pass on efficiently any stimulus measures. And, if Draghi does not yet know that, it’s even worse.

Shotter also refers to Draghi opining that reforms since the financial crisis had boosted the resilience, “not only of individual institutions but also of the financial system as a whole”, and presenting as evidence “that the Eurozone’s banks had boosted their core tier one capital ratios — a key measure of financial strength — from 9 per cent to 13 per cent.”

And Draghi must know that it most surely is the result of banks shedding or swapping assets against which they are required to hold a lot of capital, like loans to SMEs and entrepreneurs, for assets against which they are allowed to hold much less capital. And therefore that strengthening could be absolutely meaningless for banks, or even increase the systemic risk in the banking system; as well as a great source of weakness for the economy. And, if Draghi does not yet know that, it’s even worse.

ECB, Mario Draghi, before bank regulation distortions are eliminated, should not be allowed to waste any more in QEs or other similar stimulus.

One could also ask, how long Europe will stand for having financial authorities that, demonstratively, are not up to the task?

@PerKurowski ©

What bank regulators do not yet understand and do not yet discuss, is truly scary stuff

Sir, John Vickers who chaired the Independent Commission on Banking (ICB) writes: “A central lesson of the crisis of 2008 was that banks had woefully inadequate equity capital” “The Bank of England must think again on systemic risk” February 15.

That is dangerously imprecise! The central lesson of the crisis was that banks had woefully little capital against assets that had ex ante been perceived or deemed very safe as a result of woefully wrong regulations.

The regulators allowed banks to hold much less equity against safe assets; which allowed banks to leverage much more their equity with safe assets; and which allowed banks to earn higher risk adjusted returns on equity on safe assets than on risky assets.

And the fact that regulators are still not able to comprehend that it is not their role to regulate based on what assets a bank has, but based on how banks manage those assets, is just scary.

And the fact that regulators are still not able to digest the truth that the assets that are really dangerous to the stability of the banking system are not the risky but those perceived as safe, is just scary.

And the fact that the distortions in the allocation of bank credit to the real economy that risk weighted capital requirements produces are not yet even discussed, is just scary.

@PerKurowski ©

Even though there is hunger, could Venezuela be servicing religiously its debt because of who the bondholders are?

Sir, even though Venezuela is suffering lack of food and medicines, it is doing all it can to pay its foreign bondholders. Andres Schipani quotes Bank of America’s Francisco Rodriguez in that “Venezuela could continue paying bondholders for longer than it keeps paying Maduro’s salary”, “Maduro’s Venezuela on the brink of default" February 12.

Could it be that all these bondholders are in fact the same usual local friends of the government and who in these bonds have just found another way to further exploit this poor-rich country? I mean it is hard to visualize any ordinary reasonably responsible investor, no matter how big the spreads, putting money in Venezuelan bonds while knowing without doubt that the resources raised by debt will be wasted just the same way as the greatest oil-boom in history has been wasted.

The world needs a sovereign debt restructuring mechanism (SDRM) but, for that to serve us citizens any useful purpose, and not even be counterproductive, it must begin by establishing clearly the differences between bona fide lending and odious credit.

@PerKurowski ©

The CET1 (common equity tier 1) divided by the leverage ratio, gives you a Gross Risk Hiding Ratio

Sir, James Shotter and Laura Noonan, while admitting that “the absolute level of the CET1 (common equity tier 1) is only part of the equation, they do compare Deutsche Bank’s CET1 with that of other banks. “Deutsche focus turns to towering task ahead.” February 10.

The common equity tier 1 ratio is calculated with the bank’s core equity in the numerator and with in the denominator the risk weighted assets, calculated with risk weights not assigned by me. So the safer the assets are perceived or deemed to be, the higher the CET1.

And the Leverage Ratio uses in the denominator the gross value (of most) assets.

As FT should know by now, I have always felt much more nervous about the assets a bank (or regulators) could perceive as very safe than with assets perceived as risky. And so I do give more importance to the leverage ratio than, for instance, to the CET1 ratio.

But the regulators would not allow us data on the leverage ratio, because, in their opinion, that would not reveal the real leverage to us and it would therefore only confuse us. And so they decided to credit-risk weigh the assets, and came up with the CET1 ratio or the slightly more generous Tier 1 Common Capital Ratio.

And of course that made many in the market feel much more comfortable with that the banks were quite adequately capitalized.

But one needs to adapt, and so I felt that new interesting ratios would be found in the market whenever the leverage ratio was published. And among these the CET1 ratio to the leverage ratio-ratio, because that ratio could be said to represent, the Gross Hiding Risk Ratio.

Though I admit I could be using wrong data, I found the following leverage ratios at end of 4th quarter 2015: Deutsche Bank 3.9; Goldman Sachs 5.9; Wells Fargo 8.0; and Morgan Stanley 8.3.

And if we take the CET1 ratios reported in the article and divide these by the leverage ratios we obtain the following Gross Risk Hiding Ratios: Deutsche Bank 2.85; Goldman Sachs 2.19; Wells Fargo 1.34 and Morgan Stanley 1.70

So if these calculations are correct then no wonder why Wells Fargo “is often described as the US’s safest banks [and] there are no [current] calls for a capital raising”… and no wonder Deutsche Bank faces quite bigger challenges.

@PerKurowski ©

Rod Stewart, it would be hard for you to find your way back home, it has been castrated.

Sir, Martin Wolf opines: “The battle over Brexit matters to the world” February 10. But does that matter the most to Britain?

Rod Stewart in “Way Back Home” remembers his childhood with: “And we always kept the laughter and the smile upon our face. In that good-old-fashion British way with pride and faultless grace”

And his song ends with Winston Churchill reciting in the background: “We shall fight on the beaches. We shall fight on the landing grounds. We shall fight in the fields, and in the streets. We shall fight in the hills, we shall never surrender”

But Rod, for your info, Churchill’s England has indeed surrendered to risk aversion, thanks to its bank regulators.

In Britain the banking sector represented so much. And just to think about the reasoned and astute daring of their merchant banks should make any Britt proud.

But you have a Britain that now allows foreign bank regulators in the Basel Committee, to allow its banks to hold less equity against what is perceived as safe than against what is perceive as risky; and therefore Britain now allows its bankers to make higher expected risk adjusted profits when lending to “the safe” than when lending to “the risky”; which of course is de-testosteronizing, or outright castrating Britain’s banks.

Therefore much more important for Britain than a Brexit, is a Baselexit, which means ignoring all those regulators who ignore that: “A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

Were bank regulators sufficiently vetted, or did those who appointed them simply not understand what banks are for?

Sir, Laura Noonan writes: “Here lies the big bank that once loaned billions to local businesses, but is now unwilling and unable to support the economy. Fondly remembered by its risk-adverse managers and overzealous regulators, its passing is deeply regretted by local business owners. Rest in peace… Surveys from the Bank of England chart an almost uniform contraction of lending to UK businesses from banks and building societies in recent years”, “Challenger banks move to stand out from the crowd” February 9.

Was it really a case of “overzealous regulators”? No! It was a case of dumb regulators who allowed banks, depending on how the risk of an asset was perceived or deemed to be, to have different levels of capital (equity); and who thought that would not distort the allocation of bank credit to the real economy. Or, worse, did not care one iota about if that happened.

How many of you in FT have read Basel Committee’s 29 Core Principles for effective banking supervision? To read these, and to think about their implied regulatory arrogance, should cause anyone to ask whether someone has properly vetted these bank regulators, before they were assigned with the responsibility of writing the rules for all of our banks… or did not vet them because they did not want to admit they did not understand what was being argued?

We have recently read about the extraordinary self-created reputational extravagances of a Paolo Macchiarini, and how some uncritical acceptance of these is even questioning the committee of the Karolinska Institute of Sweden that selects the Nobel Prize for medicine.

After so many years, and so many unanswered questions about current bank regulations, I have all the reasons to suspect something equally terribly wrong could be happening in Basel.

Adam Cyralsky wrote about Paolo Macchiarini in ‘The Celebrity Surgeon Who Used Love, Money, and the Pope to Scam an NBC News Producer”, Vanity Fair January 2016.

And there Cyralsky, in order to understand how “someone of considerable stature could construct such elaborate tales and how he could seemingly make others believe them”, turns to Dr. Ronald Schouten, a Harvard professor who directs the Law and Psychiatry Service at Massachusetts General Hospital. The answer he gets is: “We’re taught from an early age that when something is too good to be true, it’s not true… And yet we ignore the signals. People’s critical judgment gets suspended. In this case, that happened at both the personal and institutional level.”

And I translate this to perhaps mean that when bank regulators said: “We can save you from banks failing” and backed it with something that sounded so reasonable as “more risk more capital and less risk less capital”, then the critical judgment of those who appointed them got suspended.

But the world can ill afford such suspension. The credit risk adverse regulations cause banks to finance less and less the risky future; and only refinancing more and more the “safer” past. That has to stop, for the good of our children and grandchildren.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

“A free lunch?” That depends a lot on who is doing the cooking. The Basel Committee’s lunch is both expensive and bad

Sir, Lawrence Summers writes: “The strengthening of regulation reduces the incidence of financial crises, thus improving economic performance while promoting fairness by helping consumers.” “No free lunches but plenty of cheap ones” February 8.

That could happen, but please let us not confuse strengthening with dumbing.

Right now the pillar of bank regulations is the risk weighted capital requirements for banks; more ex ante perceived risk more capital – less ex ante perceived risk less capital.

That, by making the access to SMEs and entrepreneurs, “the risky”, more difficult than the one for “the safe”, sovereigns and AAArisktocracy, hardly promotes fairness, it actually promotes inequality, and neither does it help consumers in need of job opportunities.

But let us also not ignore that major bank crisis never result from excessive exposure to something that was ex ante perceived as risky, but always from excessive exposure to something ex ante perceived as safe but that ex post turned out to be very risky. And, in this respect, these regulations, allowing for too little capital when real shit hits the fan, also increase the severity of the really big financial crises.

“No free lunches?” Well as we can see that would also very much depend on who is doing the cooking, and of who are having lunch. Currently our bank regulators are serving us both a very expensive and lousy lunch. 

@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 ©

When financing art, should Old Masters be credit rated based on their value volatility?

Sir, I refer to John Dizard’s discussion of “the business of lending against art collateral”, “Art world may be struggling but lenders are still happy to rely on an Old Master” February 6.

Dizard writes about a “an avalanche of loan applications from Europe” but “the banks that made lending facilities available in the past are not doing so any more” because the banks “are under tremendous regulatory pressure. Every European bank is scrambling for sufficient capital.”

It is a very interesting article. But, sincerely, should FT not be much more concerned with all the financing of SMEs and entrepreneurs that is not happening in Europe for precisely the same reasons… namely that capital scarce banks are allowed to hold much less capital against assets ex ante perceived or deemed as safe?

That said… might there be room for credit rating of art? That could allow banks to hold less capital against some Old Master that possesses less value volatility. Or would that only incentivize the production of more AAA rated Leonardo Da Vinci fakes?

@PerKurowski ©

A Cloud should provide us with legally non-contestable statements of our investments, a nanosecond before a cyber-blackout.

Sir, I refer to Robin Wigglesworth “HFT chief warns of ‘hole’ in electronic system”, February 5.

Getting into the paperless, and the soon perhaps currency-less society, requires someone somehow to provide security for everyone… from the holder of a small savings account to the plutocrat with a billion-dollar portfolio.

I believe everyone would sleep better were they sure they had access to a legally non-contestable file that proved what assets they held since the last transaction recorded, and until that nanosecond before the horror of a blackout occurred.

Is that something a government should offer? They might contract it out, I don’t mind, but this is clearly among the security sovereigns should provide their citizens… although external auditing and extra guarantees would not be bad to have in the case of the so and so existing sovereigns… and in the case of the in waiting so and so sovereigns, which could, sooner or later, be all sovereigns.

@PerKurowski ©

How could central bankers, and Martin Wolf, convince us (me) they know what they are doing?

Sir, Martin Wolf asks: “What might central banks do if the next recession hits while interest rates were still far below pre-2008 levels?” And he answers, “the most important part of such preparation is to convince the public that they know what to do.” “Prepare for the next recession”, February 5.

Not an easy task. For example I have always felt more uneasy with what banks might ex ante consider safe, than with what they could perceive as risky. But regulators, with Basel II, introduced risk weighted capital requirements for banks in which they for instance assigned a risk weight of 150 percent to assets rated as ‘highly speculative’ below BB-, while only a meager 20 percent risk weight for ‘prime’ AAA rated assets.

That not only seriously distorted the allocation of bank credit to the real economy but also set up banks for, when any ex post credit risk realities could sink in, that they stand there with little equity to cover themselves up with.

But seemingly there is no way I can convince central bankers, regulators, or Martin Wolf, that is a dangerous nonsense and so, at least in my view, I am convinced they do not know what they are doing.

Wolf also comments on the notion that doing nothing, searching for a “cleansing depression” is “crazy, given the damage it would do to the social fabric”. I am not sure. In August 2006, FT, before I was censored, published a letter I wrote titled “Long term benefits of a hard landing” and nothing about the many efforts to achieve a soft landing I have seen, have really made me change my mind.

@PerKurowski ©

Redistribution profiteers who committed economic crimes against humanity sequestered Venezuela

Sir, I refer to Ricardo Hausmann’s sadly true “It could be too late to avoid catastrophe in Venezuela” February 4.

These days when so much is said about fighting inequality, Venezuela is a tragic example of what happens when a country falls into the hands of shameless redistribution profiteers. All countries need to develop more transparent government accounts that allows us them to measure the real costs of redistributing wealth.

For instance in the case of Venezuela the fact that the prices of petrol (gas) have not increased once since Chavez came to power 17 years ago has signified that just in free petrol the country has over the last years given away more than in all their other social programs put together… if that is not an economic crime against humanity (and environment) what is. I have tried to denounce it to the Organization of American States but they are more interested in conventional and traditional crimes against humanities.

Over the last 15 years the poor of Venezuela might not have received even 10 percent of the oil wealth that was redistributed… which would indicate a redistribution commission of 90 percent.

Clearly if other methods like direct oil revenue sharing with citizens had been used, the 10-90% figures here could have been 98-2%. And of course, had the oil revenues belonged to the citizens, the government could not have “used it to quadruple the foreign debt.”

Set into this context it is obvious that all should closely study experiments like Finland’s substituting with a basic monthly income for all the bureaucrats’ management of benefits.

PS. One of the most sad events in my lifetime has been when the US did not follow through on the idea of promoting oil revenue sharing in Iraq. Had it done so the whole middle east, and of course Venezuela, if following the example, could have been facing much better realities.

@PerKurowski ©

Former Executive Director at the World Bank, for Venezuela, 2002-04

Caring more about us, the targets, would go a long way to improve advertising efficiency on the web, and reduce fraud.

Sir, John Gapper describes some tip of icebergs in the word of online advertising “Regulators are failing to block fraudulent ads”, February 3.

But I also assume that those paying for the ads do not pay, or stop the advertising, if the ads fail to translate into profits.

We, the targets, we used to be hit with some few advertising bullets while reading a paper, looking at TV or listening to radio… now, on the web, more and more we are hit with thousand of ad pellets, which give very little consideration to the physical limits of our attention span. If the computer has a malware that keeps it reading ads while I sleep I don’t care… but when I sit there and try to use the web for its original purposes the ads are really getting into my way and into my nerves.

What could be done about it? I have suggested the advertisers, with the help of ad-blockers, take contact directly with us the targets. I am sure we could work something out. I my case I have offered to hire out my very scarce attention span for 30 seconds against the low price of US$ 1… initially!

@PerKurowski ©

But what if the elite does not possess the necessary qualifications to function as an elite?

Sir, it is interesting how Martin Wolf, as FT`s leading economic commentator a part of the elite, is able to distance himself from the elite in order to recommend to the elite what to do. “Bring the elites closer to the people” February 3.

Wolf suggest for example: “capitalism must be kept competitive… One response is to promote competition ruthlessly. This will require determined action”.

Indeed, but yet Wolf has steadfastly refused to object current bank regulations that clearly curtail, more than what is usual, the capacity of those perceived as “risky”, like SMEs and entrepreneurs, to compete for bank credit in fair terms.

During soon three decades the pillar of bank regulations have been the risk weighted capital requirements for banks. What kind of crazy elite could feel so empowered so as to dare introduce regulations that utterly distort the allocation of bank credit to the real economy? And, to top it up, base it on one of the few risks that are already cleared for by banks? And, to top it up, base it on the risk of the assets of the banks, and not on the risks that banks cannot manage the risk of their assets?

The regulators, in Basel II, set the risk weight for ‘prime’ AAA rated assets at 20 percent, and at 150 percent for ‘highly speculative’ below BB- rated assets. I just ask again, for the umpteenth time, what have we done to deserve regulators who believe that what is ex ante perceived as so risky is more dangerous to banks than what is perceived as so safe?

In Basel I they set the risk weight of sovereign at zero percent and that of the private sector at 100 percent. And I just ask again, for the umpteenth time, what have we done to deserve regulators who impose such statism through the backdoor?

Wolf writes: “The governance of complex modern societies requires technical knowledge” — and he mentions that a Republican candidate has been described as a “mountebank”. I don’t know about that but “mountebank”… charlatan, is a term quite applicable to the members of the bank regulatory elite… and to their little helpers and defenders.

Sir, an elite that acts like members of a mutual admiration club, is a totally useless elite. The elite, in order to fulfill its functions, needs to be able to socially sanction its members.

PS. At this moment, when clearly it is important to find ways to fight growing inequality, it is also the responsibility of the elite to make sure that endeavor is not commanded and carried out by some redistribution profiteers… which would just make it all much worse… as we Venezuelans can testify.

@PerKurowski ©

Regulators impede many who represent the driving force of capitalism from competing for bank credit in fair terms

Sir I refer to John Thornhill’s interesting discussion of organizations’ internal obstacles to competition and innovation “The path to enlightenment and profit starts inside the office” February 2.

Thornhill states “As the driving force of capitalism, competition gives companies a purpose, a mission and a sense of direction” but unfortunately “The incentive structures of many companies are to minimise risk rather than maximise opportunity. “Innovation is often a young company’s game.”

But let me pick up on that to remind you, for the umpteenth time, of the nasty consequences of current credit-risk-weighted capital requirements for banks. These allow banks to leverage more with exposures to the safe than on exposures to the risky; and so banks are therefore able to earn higher expected risk adjusted returns on equity when lending to the safe than when lending to the risky. And so the current regulatory incentives given to banks are set in order to minimize their exposure to any “risky” assets, rather than to maximize the opportunities that could easier result were banks free to allocate their credit to the real economy without distortions.

Thornhill mentions: “Innovation is often a young company’s game.” Yes and it is precisely “young companies” that usually are perceived as “risky” and are therefore now blocked from competing for access to bank credit in fair terms.

PS. Thornhill also refers to Herman Hesse’s “Knowledge can be communicated. Wisdom cannot.” In 2003, as an Executive Director of the World Bank, and in relation to the financial sector I wrote the following in a formal statement delivered at the Board:

“As the financial sector grows ever more sophisticated, making it less and less transparent and more difficult to understand for ordinary human beings, like EDs, it is of extreme importance that the World Bank remains prudently skeptical and vigilant, and not be carried away by the glamour of sophistication. In this particular sense, we truly believe that the World Bank has a role to play that is much more important than providing knowledge per-se and that is the role of looking on how to supply the wisdom-of-last-resort.”

Unfortunately, even though the World Bank is the world’s premier development bank, it has not yet explained to the world that risk-taking is the oxygen of any development.

@PerKurowski ©

At least Lucy Kellaway defends with honor the “Without fear and without favor” motto of the Financial Times

Sir, Lucy Kellaway does great living up to “Without fear and without favor” when she socially sanctions all the full of themselves experts, and those who socially suck up to these. Well done! “Boneheaded aphorisms from Davo’s windy summit.” February 1.

It is a real pity there are not many more like her at FT. The world could benefit a lot if the journalists at FT dared to, for instance, question more current bank regulators on what they are up to… like for instance with their zero risk weight to sovereigns and the 100 percent risk weight for that private sector that makes the sovereign strong.

@PerKurowski ©

“In a world where debt overhang holds growth back for years” what could happen to the safety of “safe assets”?

Sir, David Oakley writes about the possibility that “QE will only properly end when all the bonds purchased mature”. And “For fund managers, it means government bonds may have a more lasting appeal as yields remain lower for longer because of an underlying demand for safe assets in a world where the debt overhang holds growth back for years.” “We are the QE generation, and it is quite a burden” February 1.

But a more relevant question could be: “in a world where the debt overhang holds growth back for years” what could happen to the safety of those “safe assets”?

Here we are with central banks sitting on a great portion of sovereign bonds they cannot retire without affecting the market too much; while at the same time they fix the risk-weight of these bonds, for the purpose of the capital requirements for banks, at zero percent, while that of those who are the only ones who could help growth, the private sector, has a risk weight of 100 percent. Is that not an example of sheer human lunacy that has us begging urgently for some artificial intelligence to bail us out?

@PerKurowski ©