September 05, 2015

We must make sure our bank regulators possess sufficient mental bandwidth to perform their duties

Sir, Tim Harford writes that a study in 2006 led by David Strayer, a psychologist at the University of Utah, found that: “The problem with talking while driving is not a shortage of hand. It is a shortage of mental bandwidth” “Multi-tasking: a survival guide” September 6.

What an interesting piece of information. Now we only have to find a reliable way to measure mental bandwidth, so as to be able to make sure vital decision makers have sufficient of it.

Clearly that was not the case of bank regulators. As a minimum these should have sufficient mental bandwidth so as to be able to simultaneously regulate against the risks of the banking system collapsing, and make sure that banks adequately achieved their purpose, like that of allocating credit efficiently to the real economy.

As is their mental bandwidth was so scarce they could (and can) only handle the risks of individual banks failing. As a result our whole economy is failing here and there.

Had they had enough of it they would have understood that the speedier an individual bank that cannot perceive adequately risks or manage these fails, the safer the whole system.

Had they had enough of it they would have understood that the last thing they should do in order impose capital requirements as a shield against unexpected losses, was to base these on about the only risk that was already being sufficiently cleared for, namely credit risk. 

Had they had enough mental bandwidth they could have set their capital requirements based on a thousand more appropriate risky events, like cyber attacks, China’s economy imploding, or central bankers not having a clear idea of what they are doing. 

@PerKurowski

September 04, 2015

The corrective glasses prescribed to bankers by their regulators, distorts even perfect credit risk perceptions

Sir, Gillian Tett writes: “If you want to see what can happen when a government tries to prop up stock and land prices, Tokyo’s story is sobering. It shows that not only do interventions carry a financial cost (since they rarely work for long), but that they can be a lasting drag on investor psychology.”, “China risks repeating the errors of Japan” September 4.

Well said, but let me use this same construct for what Ms. Tett seemingly finds too hard to understand: “If you want to see what can happen when regulators tries to prop up bank lending to what is perceived as safe, the story of the recent financial crisis is sobering. It shows that not only do interventions carry a financial cost (since they rarely work for long), but that they can be a lasting drag on investor psychology.”

Sir, in my quest of finding the words able to explain the huge regulatory mistake to you and your journalists, I today venture the following:

Bankers look at perceived credit risks, like for instance credit ratings. What regulators should therefore hope for, is that those credit risks are correctly perceived, and that the bankers know how to manage these.

Instead overly anxious regulators imposed risk-weighted capital requirements, which forces the bankers to wear corrective glasses that makes them perceive much safer the safe and much riskier the risky. And so now, even when credit perceptions are absolutely correct, these will still distort.

@PerKurowski

September 03, 2015

The credit-risk weighted capital requirements for banks should never even have been on the table as an alternative.

Sir, Dominic Rossi writes “Negative real interest rates on bank deposits cannot be the road to prosperity, yet the promise of low nominal returns on traded securities looks risky… It is only by investing in innovation that we can escape this otherwise humdrum nominal world”, “Don’t look for escape routes when the third deflationary wave hits” September 3.

And I just ask: Are current credit-risk weighted capital requirements for banks helpful or not when it comes to allowing fair access to bank credit to finance innovations? Or is it only borrowers with high credit ratings who should be allowed to innovate?

The global deflationary wave that is hitting our economies is very much caused by the retrenchment of bank credit to whatever is perceived as risky, caused by the risk weighted capital requirements being applied to scarcer bank equity.

It is amazing to read how many claiming for less government austerity are simultaneously ignoring or even claiming for more bank credit austerity. 

If we want to get out of this we must realize that since risk taking is the oxygen of any development, we must get rid of that loony risk aversion of regulators that hides behind the risk-weights. God make us daring!

@PerKurowski

FT, why should bank regulators have the right to game the capital requirements with their credit risk weights?

Sir you write: “bad accounting practices can contribute to financial instability. Booms flatter their measured profitability, which encourages them to take more assets on to their balance sheets. Thus leverage begets more leverage throughout the banking system, until asset prices can rise no longer and the whole edifice comes crashing down.” “Banks should not be able to game accounting rules”, September 3.

Of course you are absolutely right we need the good accounting practices, but, frankly, don’t you think that no matter how bad the accounting, it could never have caused the kind of bank leverages that the regulators allowed for with their credit-risk weighted capital requirements. For example what about the over 60 to 1 leverages authorized in Basel II for bank exposures to AAA rated securities or to sovereigns rated like Greece was until November 2009? What about that infinite leverage authorized by Basel I in 1988 when regulators decreed the risk weights for OECD sovereign to be ZERO percent? If that is not gaming what is?

Sir, why do you insist in covering up for the fundamental mistake of the Base Committee; or when will anyone in FT dare to explain why these regulations do not dangerously distort the allocation of bank credit to the real economy?

And you also write: “Bankers complain that a tougher regime might force them to realise more losses in the short term. Tough.”… Yes, tough on banks… but, because of banks then having less capital, and the risk weighted capital requirements, it would also be tough on all those borrowers who would have even less access to bank credit… something which would also be tough for many unemployed.

@PerKurowski

September 02, 2015

Credit-risk weighted capital requirements for banks makes efficient capital allocation, a mission really impossible

Sir, John Kay writes: “Efficient capital allocation requires above all the knowledge and experience to asses the quality of underlying assets, and the capabilities of those who manage them. Yet the ability most valued in the finance sector in the first decade of the 21st century was a keen appreciation of asset markets themselves. The deployment of such abilities by people with an exaggerated idea of the relevance of these skills, and an overblown sense of their own competence, plunged the global economy into the worst financial crisis since the Great Depression.” “The clever marketeers who crashed the economy”, September 2.

That is true but it is absolutely not the whole truth. Those clever markeeters would not have been able to get as far as they got, meaning to leverage the banks as much as they did, without the intimate cooperation provided by regulators. And these have even just as much, or perhaps even more overblown sense of their competence.

The bank manager John Kay remember from his schoolboy days in the 60s, and “who would base his lending decision as much on his local knowledge and the character of the borrower as on figures”, did not have to deal with credit-risk weighted bank capital requirements.

Sir, no matter how much “knowledge and experience to asses the quality of underlying assets” bankers could have, those capital regulations make any “efficient capital allocation” a mission really impossible.

Sir, dare an answer: Where would we be if our forefathers’ banks had been subject to credit-risk weighted capital requirements?

PS. Behind too many overblown senses of competence, hide too many uncritical journalists in awe.

@PerKurowski

Insurance: Is anyone looking at how Solvency II might affect investments in the real economy and the premiums to pay?

Sir, Alistair Gray writes about how investors in the insurance industry are struggling to assess the impact as European regulators finalize details of Solvency II regime, “Insurers face crunch over new capital rules” September 1.

Is anyone looking at how Solvency II might affect the investments of the insurance companies in the real economy?

Is anyone looking at how Solvency II might affect premiums for covering different risks?

The answer to both those question is most probably a “NO!” That because regulators molded in credit-risk weighting traditions, clearly do not care one iota about such minutia.

So what could the consequences of Solvency II then be for other than the investors?

First, it will certainly create incentives for insurance companies to hold more of safe “infallible assets”, and so there will be additional demand for sovereign debt and less demand for riskier assets… like long term investments in infrastructure projects. And so the safe havens will be further dangerously overpopulated and the riskier but perhaps worthier bays even more underexplored.

As for the insurance clients let me speculate over what it could imply in terms similar to those applied by the Basel Committee to banks. For instance when selling health insurance to smokers and non-smokers.

Traditionally insurers looked at actuarial risks of smokers and non-smokers in order to decide on the premiums to charge and the exposures to accept, and that was it. But, now, it could be that since regulators believe the smokers are “riskier” than the non-smokers, Solvency II could have in mind using the same actuarial studies in order to set higher capital requirements for insuring smokers than insuring non-smokers. That would of course mean that the spread in premiums paid by these two groups would increase… and drive up any inequalities.

@PerKurowski

August 29, 2015

We urgently need “Flop Pickers” or “Harbingers of Failure” to test those who are being picked as bank regulators.

Sir, I refer to Tim Harford’s “Meet the Flop Pickers” August 29. Boy could some good “Harbingers of Failure” have come in handy to stop the disastrous bank regulations flop.

What did the members of the Basel Committee for Banking Supervision do?

They based their capital requirements for banks on perceived credit risks, blithely ignoring that those risks, by means of interest rates and size of exposure, were about the only risks already being cleared for by the banks.

They assigned much of the role in determining credit risk to some very few human fallible credit rating agencies.

They based their capital requirements for banks, those that are primarily to cover for unexpected losses, on the credit risk perceptions about expected losses, blithely ignoring that the safer something is perceived, the larger its potential of delivering unexpected losses.

They regulated banks not caring one iota about the purpose of banks, and so they blithely ignored the vital function of banks of allocating bank credit efficiently to the real economy.

And so, by allowing those perceived as absolutely safe to have even more and cheaper access to bank credit than normal, while those perceived as “risky”, like unrated SMEs and entrepreneurs to have even less and more expensive bank credit than normal, they have made a great mess of banks, one of the most important components of our financial system.

And, to top it up, they decided governments were much safer than the private sector and that therefore bank needed to hold minimum capital when lending to governments, something that de facto meant that regulators believe government bureaucrats can use bank credit more efficiently than the private sector.

So you tell me… would it not be extremely important to have access to “Flop Pickers” or “Harbingers of Failure” to test those who are to be picked as bank regulators?

Could you please ask Eric Anderson, Song Lin, Duncan Simester and Catherine Tucker to see if they could find us some adequate Herbs to tests bank regulation products?

Urgently... since the same failed regulators keep on regulating without even acknowledging, and much less correcting their mistakes!

PS. They have blamed credit rating agencies though... without understanding that their regulations would cause dangerous distortions even if the credit ratings were perfect.

@PerKurowski

August 28, 2015

Why do financial regulatory authorities, while preaching the value of diversification, act in favor of concentration?

Sir I refer to Harriet Agnew’s “FT BIG READ. Professional Services: Accounting for change” August 28.

In November 1999, in an Op-Ed in Caracas Venezuela, this is what I had to say on what is discussed there:

“I recently heard that SEC was establishing higher capital requirements for stockbroker firms, arguing that . . . ‘the weak have to merge to remain. We have to get rid of the rotten apples so that we can renew the trust in the system.’ As I read it, it establishes a very dangerous relationship between weak and rotten. In fact, the financially weakest stockbroker in the system could be providing the most honest services while the big ones, just because of their size, can also bring down the whole world. It has always surprised me how the financial regulatory authorities, while preaching the value of diversification, act in favor of concentration.

The SEC should not substitute the need for capital in place of the need for ethics, nor should it allow that fraudulent behavior hides amid the anonymity of huge firms. In this respect, let us not forget that the risk of social sanctions should be one of the most fundamental tools in controlling financial activities.

Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

@PerKurowski

To solve its immigration concerns, in harmony, Europe needs to free itself from all preachy political correctness

Sir, I refer to François Heisbourg’s “France cannot indulge the xenophobes on immigration” August 28.

Heisbourg writes: “The question of immigration, a visceral issue… is driving a wedge between EU populations and their governments, between member states and indeed between the EU itself and the values on which it was founded.”

And in order to bridge the gap he suggests EU “a response to the immigration crisis that lives up to rather than falls short of its values…most EU member states… are not providing the systematic right of asylum to which war-refugees are entitled under international humanitarian law or by common decency.” “Europe’s leaders need to live up to our responsibilities as humans and as neighbors, assume part of the burden, and talk straight to the electorate.”

What straight talk is he talking about? That the deliberate conflation by demagogues of immigration, the refugee exodus, the spread of Islam and jihadi terrorism is as emotionally powerful as it is factually spurious”, and that therefore Europeans have no moral right to feel humanly uneasy about immigration?

That is precisely the type of holier than thou political correctness, a Neo-Inquisition, that serves as growth hormone to extremist movements.

If anything politicians who want to build bridges, need to share the concerns, not negate their existence or outright condemn their validity; all in order to then proceed to openly discuss what can be done. For instance, should there be a limit to how many immigrants Europe can accept the next-decade, and if so, what number… 10 million, 100 million or no limit at all?

My age group, and those older of course, have basically seen world population triple during our lifetime. One way or another, that sole fact tells us there are some changes going on that, for good or for bad, were perhaps not embedded in our values.

If you think I am just another political incorrect who is against immigration, I invite you to visit my:

http://theamericanunion.blogspot.com

PS. On the other side of the pool, where would Donald Trump be, if he had no political correctness trampoline to jump on?
@PerKurowski

August 27, 2015

A Leverage Ratio makes banks hold equity on all exposures, to cover specially for unexpected losses, like cyber attacks

Sir, I refer to the letter signed by financial sector representatives: “Leverage ratio threat to the cleared derivatives ecosystem” August 27.

What is argued, that segregated cash margins, held to guarantee the commitments of clients, should be deducted from a bank’s actual exposure, sounds quite reasonable since the current construct of the leverage ratio “fails to consider existing market regulations that mitigate…losses”.

But when it is said that: “The leverage ratio is designed to require banks to hold capital against actual exposures to loss”, that is wrong. The leverage ratio is there to cover for any exposures to losses, most importantly any unexpected losses.

It would for instance be easier for regulators to just state that the leverage ratio is to cover against cyber-attacks… so as to clear the air, while moving towards a completely different Basel IV.

@PerKurowski

August 26, 2015

If we are going to have a Basel IV that works for the economy, it cannot be built on principles of Basel I, II or III

Sir, Simon Samuels is half right when opining: “It is one thing to decide that tighter regulations are worth the cost. It is another to exacerbate that cost through delay and indecision” “Make up your mind on banking regulation” August 27.

Half right because much more than tighter regulations, we need better and less distorting regulations.

In his article Samuels, surely quite unwittingly, describes well how the risk-weighted capital requirements in Basel regulations distort the allocation of bank credit. When he writes: “a business that has a 17 per cent return on equity under Basel III might earn a paltry 3 or 4 per cent under Basel IV”, he should not ignore that a lot of lending that previously gave banks a decent return on equity, equally became bad business with the introduction of the risk-weighted capital requirements.

Before the introduction of credit risk weights, all borrowers competed with their risk-adjusted margins on equal terms for the access to bank credit. Now those who are perceived as safe, and which therefore generate lower capital requirements, are favored because their risk-adjusted margins can be leveraged many times more on bank equity than those of the “risky”. The problem of SMEs and entrepreneurs is that their voice is much less heard than that of the banks and of the AAArisktocracy.

I do understand that Samuel, as a bank consultant, shows much concern for the banks… but let me assure him that any delays and indecisions about correcting current bank regulations are hurting the real economy much more… and, implicitly, therefore also hurting the banks too.

Bankers, if good citizens, should know that making great returns on equity based on misallocations of credit to the real economy… hurts the future of which their kids are also a part.

@PerKurowski

Capital requirements, non-performing loans, down-ratings and fines are causing severe bank credit austerity.

Sir, Henny Sender writes: “A world awash with dollars is rapidly being replaced by a dollar-scarce world” “Pain for those most in debt looks certain to become more severe” August 26.

Yes, and that dollar scarcity will, as is, primarily generate a contraction of bank credit. Consider what is happening:

Regulators are increasing capital requirements, which put banks lending capacity under pressure.

More non-performing loans and credit down-ratings of borrowers put additional strain on the banks.

And to top it up there are the fines. The recently reported fines of $260bn for the largest 25 banks, when calculated for a leverage of 15 to 1 results in about 4 trillions less bank-credit availability.

But when Sender writes: “It is still not sure how the pain will be distributed though”, I would tend do disagree.

If bank regulations keep the risk-weighted capital requirement component, there is no doubt of who are going to suffer the most; that will be those who generate the highest needs of capital, namely “the risky”, like SMEs, entrepreneurs and the downgraded.

Since those risky already are perceived to generate much expected losses, they will generate much less “unexpected losses”, and so we should lower the capital requirements for banks when holding these assets.

Sir, if austerity has to be imposed, I much prefer that to be government spending austerity than bank credit austerity. Banks have to put up at least some capital (equity) while government bureaucrats need not to risk a dime of their own.

@PerKurowski

If John Kay truly believes in liberal education, he should help question the decisions of the job-specific trained.

Sir, John Kay writes: “the capacities to think critically, judge numbers, compose prose and observe carefully — the capacities that education can and should develop — will be as useful then as they are today” “The timeless benefits of a liberal education” August 26.

Indeed but that requires that the capacity of thinking critically gets a chance to be heard by those who certify having job-specific skills. And for that to happen those who write newspaper columns have a very special role in forwarding the observations.

Here just one example: Bank regulators, with supposedly many job specific skills, decided for instance that assets rated BB- present immensely more possibilities of generating unexpected losses than assets rated AAA. And as a consequence they require banks to hold much more capital against BB- assets than against AAA assets.

And there are freethinkers like me who holds that to be utter nonsense, because clearly the riskier an asset is perceived, by definition the less are its possibilities to generate unexpected losses. 

But, can I get help to forward this and many other similar observations on our current bank regulations? No - because journalists clearly believe much more in the regulators' job specific skills than in any liberal education and critical thinking. Is it not so Mr. Kay?

@PerKurowski

August 25, 2015

Show steel and lower the capital requirements for banks when lending to the risky, or the economy will collapse

Sir I refer to Avinash Persaud’s “Show steel and raise rates or the financial system will fracture” August 25.

Though I do not disagree with what Persaud writes, I would argue that before the rates are increased, we should get rid of the credit risk weighted capital requirements for banks. These artificially lower the interest rates on what is perceived as safe, and artificially increase the relative interest rates paid by those perceived as risky... like SMEs and entrepreneurs.

By getting such distortions out of the way, it would be so much easier for the real economy to adjust to any interest rate adjustment. By leaving these in place, the distortions in bank credit allocation could be dramatically amplified when adjusting the rates.

I hear you: “Kurowski are you crazy? Lowering the capital requirements for banks on risky assets?”

Why not? “Risky” assets present much less risks of unexpected losses than those perceived as absolutely safe… and are not unexpected losses the prime reason for which banks are required to hold equity?

@PerKurowski

August 24, 2015

In terms of capital requirements for banks, when travelling towards 20 or 30 percent, how do we survive the journey?

Sir, Jonathan Ford writes Alan Greenspan exhibited both candor and clarity in an article for the Financial Times in which he called for banks to raise substantially more capital “Higher capital is a less painful way to fix banks” August 26.

First, in that article Greenspan compared the evolution of traditional bank capital levels, with the much newer risk-weighted capital requirements concocted by the Basel Committee. They cannot be compared and so in doing Greenspan clearly evidence why he should take his retirement more serious, and better do like soldiers, just fade away.

And then, in terms of what capital requirements he has in mind, Greenspan writes about “20 or even 30 per cent of assets (instead of the recent levels of 10 to 11 per cent)”. Not mentioning whether he refers to risk-weighted assets or not, something which has implications not to be frowned at. For instance, with current risk weights of 100 percent when lending to unrated SMEs and entrepreneurs, banks could be required to hold 30 per cent in capital, while allowed to hold zero capital when lending to the zero risk weighted sovereigns… Is that what we need? And how do we get from here to there, without dying during the journey? Can you imagine the initial bank credit austerity that could ensue? 

Greenspan argued: “if history is any guide, a gradual rise in regulatory capital requirements as a percentage of assets (in the context of a continued stable rate of return on equity capital) will not suppress phased-in earnings since bank net income as a percentage of assets will be competitively pressed higher, as it has been in the past, just enough to offset the costs of higher equity requirements. Loan-to-deposit interest rate spreads will widen and/or non-interest earnings will increase.”

And I would just ask Greenspan: If you were thinking of buying bank shares… and heard about “a gradual rise in regulatory capital”, would you buy those shares now, or would you prefer to postpone that decision to when the increase in regulatory capital seems closer to being completed?

@PerKurowski

$260bn in bank fines results in about 4 trillions less bank-credit availability.

Sir, Laura Noonan, with respect to the 25 largest banks, reports “Banks fine tally since crisis hits $260bn” August 24.

And I do some multiplication $260bn times let us say a 15 to 1 leverage, results in $3.9 trillions less in bank lending capacity. So many scream bloody murder about government austerity, while not caring one iota about bank-credit austerity… how come?

Can you imagine if this $260bn in fines had been paid in fresh issued non-voting bank equity to be held by governments for about a decade?

@PerKurowski

How do you audit risk-weighted capital ratios? What would an auditor say about a zero risk weight?

Sir, ICAEW’s Iain Coke writes that since “Bank’s risk weighted asset calculations and capital ratios are currently unaudited”, “Bank capital ratios need to be audited” Monday 24.

What a great idea! I would love to see bankers and regulators explaining the risk-weights to the auditors…

Mr. Stefan Ingves, you as the current chair of the Basel Committee, how do you explain the zero risk weight for some of your favored sovereigns? And how do you explain that for purpose of setting the capital requirements that are to cover for expected losses you think those perceived as risky in terms of expected losses, can generate more unexpected losses than those perceived safe?

I can’t wait for an ICAEW endorsed audit of a bank’s capital ratio.

Coke writes “People needs to have confidence in bank’s capital formation”. Absolutely, that would be a good thing, but such an audit would certainly also shatter the confidence in bank regulators… and that would also be good, or at least a much needed thing.

@PerKurowski

The Swedish “lagom”, ‘just about the right amount’, is sort of the handiest word there is.

Sir I refer to Emma de Vita’s “Import Sweden’s lagom philosophy into your office” August 24.

When my Swedish 92 year old mother was recently questioned about her alcohol intake, by a doctor that by looks and name she presumed to be a Muslim, and that she therefore presumed did not look too kindly upon any alcohol intake… she looked up at the ceiling…rolled her eyes… for a while… until her face lit up… and with a big smile and honest face she answered… “lagom”.

@PerKurowski

August 22, 2015

Financial Times - FT: Sir, on the causes of the crisis of Greece, how about some journalistic honesty from yourself?

Sir, you write that “Ms Merkel has allowed the entire euro crisis to be portrayed within Germany as a fiscal mess caused by profligate peripheral countries. This analysis ignores the role of the financial bubble fuelled by banks — including Germany’s”. And then you title it as “The need for honesty in the crisis over Greece”, August 22.

But this Merkel analysis, and your analysis, ignores what I have been writing to you about in over a hundred of letters over the last decade, namely that the financial bubble fuelled by banks, was a direct result of Basel’s credit-risk weighted capital requirements for banks.

You know, because I do not believe you dumb, that had banks needed to hold the same capital they are required to hold when lending to any European SME or entrepreneur, 8 percent, instead of the 1.6 percent or less allowed by regulators when they lent to the Greek government, this Greek tragedy would not have resulted, no matter how much Greece might have manipulated its financial data.

You even published a letter of mine I wrote in November 2004 in which I asked: “how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

So may I suggest it is high time for the Financial Times to also display some honesty over the causes of the crisis in Greece. Who are you covering up for? Is it perhaps for some too delicate big egos? Is yours really ethical journalism? Dare to live up to your motto!


@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

August 21, 2015

Can productivity growth really happen when banks and bankers are made more adverse to perceived credit risks than usual?

Sir, Gillian Tett refers to Alan Blinder, a former vice-chairman of the Fed stating: “The Fed is clueless about the [low] trend rate of growth of productivity… Just like everyone else”, “The Fed’s productivity predicament” August 21.

As one possible explanation Tett advances “corporate investment has recently been weak”. It sounds plausible, if one accepts that it is corporate investments that produce productivity. But what if the real sources of productivity are all those SMEs and entrepreneurs who do not classify as corporations? If so, then the fact that SMEs and entrepreneurs do not have fair access to bank credit, as a consequence of the credit-risk-weighted capital requirements for banks, could explain a lot.

Or phrased differently… can it really be possible to increase productivity by making banks avoid perceived credit risks more than what banks and bankers usually do?

Seemingly no one is interested in even answering that question… bank regulation technocrats the least.

Fed: You want productivity? Why not capital requirements for banks based on the potential of productivity gain ratings?

@PerKurowski

August 19, 2015

The Bolivarian Revolution in Venezuela is generating great opportunities… for speculators and Vulture Funds.

I refer to Kadhim Shubber’s and Andres Schipani’s “Future of debt repayments in doubt as oil slide precipitates surge in five-year CDS”, August 19.

It says “No big oil-producing country has felt the pain of the price crash as acutely as Venezuela, where crude sales account for 96 per cent of exports.”

Sir, it is much worse than that, because that 96 percent of exports goes directly into the coffers of a very centralized government, which de facto dooms Venezuela to become, sooner or later, a failed-state.

And we then read “Francisco Rodríguez, a Venezuelan economist at the bank [of America], reckons Caracas still has some fuel and estimates some $61bn in state-owned assets could be sold to plug the holes. “Venezuela could continue paying bondholders for longer than it keeps paying Mr Maduro’s salary,” he says, alluding to parliamentary elections in December”

I wonder how would you feel if you lived in an absolutely disastrously governed country, and an investment advisor, from a reputable bank, was advising your government on how to scrape the bottom of the barrel in order for it to survive as long as possible? This advisor has placed himself completely in an après-nous et vous-le-deluge mode. Would a private citizen of such country, or of any country, look with sympathy at this adviser and his employer? I think not… I sure hope not!

What is Venezuela to do when its utterly inept government has used up that $61bn to plug the holes, which includes serving creditors/speculators… and perhaps therefore a bank economist earning a bonus?

@PerKurowski

One inequality is so bad for growth that it should enter the Guinness Book of Records.

Sir, Chris Giles discusses the point of view of OECD and IMF with respect to the relations between inequality and economic growth, “Inequality is unjust — it is not bad for growth”, August 19.

Giles correctly writes: “Vigorously promoting competition…simultaneously boosted efficiency and fairness” and “attacking vested interests and the economic rents that allow the fortunate few to gain at the expense of others is a fruitful avenue for policy.”

But Giles, sadly, finds again no reason to mention the access to bank credit, one of the most fundamental ingredients of any pro-growth and pro-equality agenda, and how bank regulations completely distorted it. Here follows a short recap:

The basic capital requirement banks had to hold against assets in Basel II of June 2004 was 8 percent.

The risk weight for an AAA to AA rated sovereign (which means money managed by government bureaucrats) was 0%, so that the effective capital requirement was 0%, so banks could leverage infinitely when lending to such governments.

The risk weight for an AAA to AA rated private sector borrower (the AAArisktocracy) was 20% so that the effective capital requirement was 1.6%, so banks could leverage more than 60 to 1 when lending to this AAArisktocracy

The risk weight for a borrower without a credit rating was 100%, so that the effective capital requirement was 1.6%, so banks could only leverage 12.5 times to 1 when lending to for instance SMEs and entrepreneurs.

That meant that banks could leverage their equity and the implicit support they receive from taxpayers immensely more lending to “The Safe” than when lending to “The Risky”.

That meant that banks could earn much higher risk-adjusted returns on their equity when lending to “The Safe” than when lending to “The Risky”.

That meant banks would lend more and at lower relative rates to “The Safe” and less at higher relative rates to “The Risky” thereby curtailing the opportunities of those who have not yet made it.

And that had banks dangerously overpopulating supposedly safe-havens like the AAA rated securities backed with mortgages to the subprime sector and Greece; which caused the very bad for growth financial crisis; while simultaneously, equally bad for growth, negating the fair access to bank credit, the opportunity, to those tough we need to get going, most especially when the going gets tough.

The number one reform that needs to take place, for growth and equality to have a fair chance, is to get rid of the credit-risk weighted capital requirements for banks; and this even if it requires to temporarily lower the basic capital requirement for banks.

However the problem with that is that it would require all experts of OECD, IMF and all other having anything to do with bank regulations to explain, the why of this distortion in the allocation of credit to the real economy… and the why of their utterly long silence on it…

And of course, on the silencing part, FT and the likes of Chris Giles, are also among those having some explaining to do.

PS. Basel III, by tightening general capital requirements for banks has, on the margin, even increased some of the distortion the credit-risk weighting cause. 

@PerKurowski

August 17, 2015

Alan Greenspan is either blind to what caused the financial crisis 2008, or does just not want to admit it

Sir, I refer to Alan Greenspan’s “Higher capital is a less painful way to fix the banks” August 18.

Greenspan has either no idea about what happened, or does just not want to admit it. Suppose the base capital requirement had been the 30% he speaks of instead of that basic 8% required in Basel II. What would that have meant in terms of effective capital requirements using the risk-weights of Basel II. Banks, when lending to prime governments with a 0% risk weight, would then have had to hold, just as today, zero capital. Banks, when investing in AAA rated securities, or getting a default insurance from an AAA rated company, to which a 20% risk weight applied, would then need to hold 6% in capital instead of Basel II’s 1.6%; while for loans to SMEs and entrepreneurs risk-weighted 100% they would then be required to hold 30% in capital instead of the 8% they must currently hold.

Would that have created more or less distortions in the allocation of bank credit? No way Jose! The current crisis has resulted much more from the existence of different capital requirements than by their standard level. Just reflect on the fact that all assets that caused the crisis have in common they originated very low capital requirements for banks compared to other assets. To fix the banks, much more important than the size of the basic capital requirement is getting rid with of the risk-weighting.

Greenspan is also guilty here of serious misrepresentation. He writes: “Bank equity as a percentage of assets, for example, declined from 36 per cent in 1870 to 7 per cent in 1950 because of the consolidation of reserves and improvements in payment systems. Since then, the ratio has drifted up to today’s 11 per cent.” The 36 percent in 1870 and the 7 percent in 1950 was bank equity based on all assets, while today’s 11 percent is based on risk weighted assets… and are therefore absolutely not comparable. Besides, analyzing bank equity without considering other security factors, like reserve requirements that have fluctuated considerably, cannot tell the whole story.

FT, may I suggest you ask all experts writing on capital requirements for banks the following two questions, before allowing him space in your paper:

First: Why are the bank capital requirements, those that are to cover for unexpected losses, based on the perceptions of expected losses?

Second: Why do you believe government bureaucrats can use bank credit more efficiently than the private sector, as your risk weights of 0% and 100% respectively de facto imply?

If they can’t give you satisfactory answers to those questions do you FT really think they have the necessary expertise to opine on this issue?

@PerKurowski

Tax profits obtained under the umbrella of patents higher, and plough those revenues back lowering medicine prices.

Sir, I refer to Jonathan Ford’s “Pricing of life-saving drugs is put under the microscope” Monday 17.

It is for sure a very difficult and delicate topic that of harmonizing the incentives needed for research to be carried out, with the need of the results of that research ending up being accessible for the general market.

For some time, and since intellectual property rights is the source of much current income inequalities, I have been suggesting those profits generated under the umbrella of patents, should be taxed at a higher rate than profits obtained when competing completely naked in the markets. 

Perhaps the revenues obtained with such taxes could be ploughed back in exchange for lower prices and thereby help to bridge somewhat the divide between the two objectives.


@PerKurowski

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


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

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

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

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

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

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

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

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

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

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

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

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

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

Just one more thing!

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

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

@PerKurowski

August 15, 2015

Mariana Mazzucato: What need rebalancing are the risk weights: Government 0% and private sector 100%, is statist lunacy.

Sir, I refer to John Thornhill's “You always need the state to roar”, “Lunch with the FT Mariana Mazzucato” August 15.

Thornhill writes: “The challenge, Mazzucato says, is to rebalance the relationship between the private sector, which is all too often overly financialised and parasitic, and the public sector, which is frequently unimaginative and fearful.” 

What is Mazzucato talking about? In 1998, with the Basel Accord, regulators introduced risk weighted capital requirements for banks. Those determined (God knows why and how) that lending to the governments was so safe it should carry a zero percent risk-weight, while lending to the private sector was so risky, that it should have a 100 percent-risk weight. 

In other words bank regulators de facto opined it was the government’s role to take risks, because it is so safe, while the private sector needs to stay away from risks, because it is so unsafe.

What happened? Banks stopped lending to the real risky risk-takers, like to SMEs and entrepreneurs (the real lions); while governments used the regulatory subsidy of their borrowings to finance, not much of real risk-taking, but mostly their political conveniences; and central banks, with their QE’s, bought solely “safe” assets; which injected liquidity to those who already hold assets, like corporations, of whom many proceeded to repurchase shares, responding naturally like kittens to the incentives.

If there is some urgent rebalancing to do, that is to eliminate all the differences in risk weights that lead to differences in capital requirements for banks and that have been imposed by the statist regulators.

Mazzucato holds: “Academics have a duty to use their expertise t challenge false political narratives”. Indeed but that includes her as well, since rarely has their been a more false political narrative than that of a sovereign being less risky than its citizens.

@PerKurowski

“The time it takes to react to a 'misdemeanor', will be in inverse proportion to its seriousness" Parkinson dixit

Sir, Matthew Vincent writes of the much speedier reactions to small time misbehaviors, like catching a ride on the corporate jet, compared to much more egregious behavior, like the manipulation of the Libor “Lessons from the Swedes on accountability" August 15.

It reminds us of Parkinson’s law that states: “The time spent on any item of the agenda will be in inverse proportion to the sum [of money] involved."

Look for instance at how fast the case against the Libor manipulators proceeded when compared to the immensely larger and more serious case with bank regulations. By means of risk weighted capital requirements, the regulators manipulated the allocation of bank credit on a global scale… and the experts have not yet given signs they have even detected their misbehavior… not even in Sweden, whose Stefan Ingves currently chairs the Basel Committee for Banking Supervision.

PS. 

@PerKurowski

August 14, 2015

Mme Lagarde, IMF owes Greece and it’s creditors, to explain and correct what was done wrong with bank regulations

Sir, Shawn Donnan writes: “There is broad agreement that the fund and its European partners badly miscalculated the extent of the negative impact of the punishing reforms and severe austerity imposed on Greece”, FT Big Read IMF “Lagarde eyes new act in Greek drama” August 14.

In 2011 during a Civil Society Town Hall meeting at the IMF I asked Mme Lagarde: “If bank regulators had defined a purpose for banks before regulating, we might have had a very different bank crisis, but not as large, systemic, and dangerous as this one…when are you going to require the regulators in the Basel Committee to openly and explicitly define the purpose of our banks… to see if we all agree? 

And Mme Lagarde answered: “My sense is that the most critical mission for the banks--and that is what we are trying to say when say that banks have to rebuild their capital buffers--is to actually finance the economy, first and foremost, and that should be really the critical mission”.

As is, now, some years later, banks still have to operate under the influence of credit-risk-weighted capital requirements, something that of course has absolutely nothing to do with adequately “financing the economy”.

So how can IMF or its European partners get anything right about Greece, if it does not want to acknowledge, or even dare to understand, how current regulations distorts the allocation of bank credit?

Those distortions, by favoring so much public debt, caused the Greek tragedy and, by discriminating against the fair access to bank credit of the “risky”, like SMEs and entrepreneurs it, stops the Greek tragedy from ending.

Mme Lagarde: IMF owes the Greek, and Greece’s creditors, to explain and to correct what was done wrong when regulating banks. That must come before anything else.

What I would do? Make sure banks needed to hold slightly less capital when lending to the private sector than when lending to government bureaucrats.

@PerKurowski

It is truly sad when financial journalists don’t care about asking the regulators… "What is the purpose of our banks?"

Sir, Gillian Tett, referring to swelling corporate cash, caused because of relatively low investments, writes that 56 percent of it is sitting in bank deposits accounts, among other because “nobody can think of anything better to do”, “The economy is infested with zombie corporate cash” August 16.

That should not be her or our main concern. What we really should worry about is what banks are doing with those deposits… like are they doing something productive, like lending to SMEs and entrepreneurs? That they don’t, only because regulators require them to hold much more of scarce bank capital when doing so. What regulators are de facto telling the banks is “lend the money to the governments, because that is what requires you to hold least capital”.

It is sad when regulators do not define the purpose of those they are to regulate, it is sadder when those who should ask regulators “why don’t you” don’t even care to ask.

How about asking the Basel Committee "Is lowering the borrowing costs for the governments the real purpose of our banks?"

@PerKurowski

August 10, 2015

Bank regulators got it so wrong; that we owe our children a full independent autopsy of how that could have happened.

Sir I refer to Nouriel Roubini’s “Rating agencies still matter — and that is inexcusable”, August 11.

Of course it is inexcusable: In January 2003, then as an Executive Director at the World Bank, FT published a letter in which I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.” And, of course I was referring to the intention of the Basel Committee of using credit risk ratings to set the capital requirements for banks.

And of course we need to get rid of those capital requirements that distort completely the allocation of bank credit to the real economy. That these are based on the same perceived credit risks that are already cleared for by banks with risk premiums and size of exposure, is sort of something mindboggling dumb.

But more than that, much more than that, we need a full detailed autopsy of how it came that basically the whole world’s banks ended up governed by such nonsense. And more than that, much more than that, we must also figure out how we have allowed so much time to go by without correcting what clearly needs to be corrected.

As I have said before, the world faces many problems, but since the solutions to those problems are becoming more and more globalized, their possible unexpected consequences can be so much more serious.

If for instance we allow helping our planet to be more sustainable avoiding global warming to go through the same type of flawed decision processes, we might only make more certain we’ll be toast.

@PerKurowski

Current capital requirements for banks are based on perceived credit risk… and on nothing more. That’s short-termism!

Sir, I refer to Lawrence Summers writing about “mandates or incentives to change business decision-making. The goal is for companies and shareholders to operate with longer horizons” and other ways to avoid short-termism, and risk aversion “Corporate long-termism is no panacea — but it is a start” August 10.

Again for the umpteenth time, there is nothing around the world that drives the allocation of financial resources based on short-termism, and avoidance of credit risk, as much as the risk weighted capital requirements for banks. These allow banks to earn higher risk adjusted rates of return on what is perceived as safe than on what is perceived as risky, without absolutely any other type of consideration.

Eliminating the distortions in credit allocation produced by those capital requirements should have the highest priority. Unfortunately that would require regulatory technocrats and similar to accept they are responsible for mindboggling mistakes… and we can’t have that… can we Mr. Summers?

@PerKurowski

The established bank regulatory elite is doing what they can to hinder the discovery of their mega-mistake

Sir, Martin Sandbu speculates that the insistence on Greece following “austerity and monetary tightening” might be because “the established elites cannot afford to admit that they were wrong” "Democracy at the heart of fight for Greece.” August 10.

Of course the elites do not want to admit they were wrong, but in this case the real mistake has little to do with their austerity and monetary tightening, and all to do with regulations.

I am absolutely convinced that without the loony capital requirements for banks that gave banks so large incentives to lend to Greece, the current Greek tragedy would not have happened.

And I am also absolutely convinced that if Greece, and the rest of the world for that matter, does not get rid of these credit-risk weighted capital requirements, those which hinder the fair access to bank credit for those perceived as “risky”, like SMEs and entrepreneurs, there is no way economies can regain healthy sustainable growth. 

It would be so easy to perform an autopsy to identify what I suggest is the source of the problem, the problem though is that many of those who created the problem, do also control much of current autopsy procedures.

Would that not make an interesting thriller, having the one who poisoned performing the autopsy?

@PerKurowski

Surprisingly many of those who could observe it from a distance, still fell for Chavez’ Banana 21st Century Socialism.

Sir, I refer to Andres Schipani’s “FT Big Read: New oil order: We are terrorized by the drop in oil prices”, August 10 2015. It is a good report but I must make two points.

First it sort of supposes that a country, during an incredible oil boom with prices over ten times those which the previous government faced, and where these oil revenues represents over 96 percent of all exports, and these all go into government coffers, is a system that has a chance to function in a sustainable way. It cannot!

Second, it mentions “the world’s cheapest petrol” and it talks about “hundreds of million dollars invested on social programmes. Less than 1 US$ cent per liter is not “cheap”, it is a giveaway… and the cost of that giveaway, when calculated at the international market price of petrol, is higher than all Chavez’ and Maduro’s social programs put together.

When Schipani mentions “The ruling Socialist party”, I hear most European Socialist parties trying to make the case of that brand of socialism having nothing to do with theirs. It would have been more helpful for the Venezuelans, if they had argued so fifteen years ago.


@PerKurowski

August 09, 2015

“PostStateCapitalism” would be a more correct title for Paul Mason’s book “Postcapitalism”

Sir, I refer to Gillian Tett’s review of Paul Mason’s “PostCapitalism”, “Mightier than the market” August 8.

It is interesting but there is a slight conceptual mistake involved with the title of the book. Pure capitalism, as we knew it, ended with the Basel Accord of 1988, when regulators, for the purpose of setting the capital requirements for banks, assigned risk-weights of zero percent to governments and 100 percent to the private sector.

So, in fact it would have been more adequate to title the book as “PostStateCapitalism”.

Perhaps the author can correct it when the next edition of the book is published.

@PerKurowski

Sovereign Debt Restructuring Mechanisms (SDRM) starting with salvaging and not with preventing, are moral hazards

Sir, Elaine Moore’s when reporting on Sovereign Debt Restructurings Mechanisms quotes Anne Krueger with: “Government should be able to declare bankruptcy, just as companies do. Instead of bailouts and lost decades of austerity, they should be able to wipe the slate clean and start again.” “Economist in a hurry” August 8.

“No!” if it means irresponsible governments will find it easier to start from clean slates

“No!” if it means irresponsible creditors will be bundled together with responsible ones.

“Yes!” if it means responsible governments will have a chance to restart their country.

“Yes!” if it means odious creditors will be required to assume the largest share of sacrifices.

And for the latter to happen, nothing better than assuring that any Sovereign Debt Restructurings Mechanism developed, diminishes the possibilities of being needed.

In this respect I believe any acceptable SDRM should begin with:

First and foremost by eliminating all incentives that can help governments contract too much debt… like banks being allowed to hold much less capital when lending to sovereigns than when lending to citizens.

And then by defining clearly what, when compared to ordinary credit to the public sector, should be deemed as odious credit. For instance, credit not awarded in a transparent way, or awarded when it was clear that the resulting debt might not be sustainable, and was therefore of speculative nature, should not receive the same treatment in a SDRM, as public credit awarded transparently and when there was no doubt about the sovereigns capacity to serve it.

Anne Krueger holds “If you get to a stage where a country’s debt is so large that it cannot grow, then you need to rethink”… and that to me, as an ordinary citizen, is best done by thinking and rethinking about how it landed itself in such a mess.

PS. The article ends quoting Krueger with “And there will be a next crisis, though where it comes from is likely going to take everyone by surprise”. If only she could convince our bank regulators of that. They still believe that the unexpected problems, for which banks need to hold capital, should be based on the expected problems derived from credit risk.

@PerKurowski

August 08, 2015

Is it time for a sort of Piketty wealth tax to be applied to the national football (soccer) league?

Sir, Tim Harford quotes Stefan Szymanski’s book Money and Football with: “It costs something like a billion quid to turn a club from a bottom-half Premier League team to one of the best teams of Europe” “How to level a playing field” August 8.

Boy that sounds like it is high time for a Piketty wealth tax to eliminate the structural inequalities in sports… so that everyone has an equal opportunity.

By sheer coincidence on August 5, I tweeted out in the Internet space: “First division soccer (football) clubs should pay out to the lower divisions' clubs, for fertilizing, 50% of all transfer payments received.”

Really, if we use handicap system in golf (more or less strokes), and handicap system in horse racing (more or less weights), why can’t we use handicap system in team sports, like taxing the better and subsidizing the lesser ones, in order to let the individuals shine more on their own worth? Aren’t teams now sort of de-facto monopolies, or at least oligopolies? 

What would happen if for instance some second tier club, to make up for their almost irreversible second tier position, would suddenly have access to pay for what them in relative terms would be a player of the category of Zlatan Ibrahimović? I think that if so the quality and the spirit of football (soccer) on a global level could prosper tremendously.

Teams might be de-facto monopolies… so why not turn football (soccer) over to all the individual players... or their fans?

@PerKurowski

Pension funds, widows and orphans have been told to keep out of what’s perceived safe, that’s now the banks’ domain.

Sir, Robin Wigglesworth writes about “an environment where many safer bonds still offer insultingly low rates” “Greed set to trump fear as high-yield bonds live up to their name” August 8.

Bank regulators, with their credit-risk-weighted capital requirements, allow banks to leverage their equity and the support received by deposit guarantees and similar, immensely, as long as they stick to lending to “The Safe”.

Consequentially the more regulators favor and therefore subsidize bank lending to “The Safe”, the lower will be the interest rates paid by “The Safe” and, of course, in relative terms the higher the rates “The Risky” need to pay.

Ergo… non-banks who have to evaluate the increased spreads between The Safe and The Risky, without counting with the regulatory bank-subsidies, are more tempted by, or are in more need of the higher rates paid by “The Risky”.

Pension funds, widows and orphans were the one investing in “The Safe” Now they have been told to get out of there… “That’s for the banks!”

The Risky, like the SMEs and the entrepreneurs they used to have access to the banks… now they are left out in the cold… desperately looking for some crowd-funding.

@PerKurowski

August 07, 2015

Bank regulators suffer “pre-dread-risk”, an exaggerated sense of fear and insecurity anticipating catastrophic events.

Sir, you know, and John Plender knows that over the years, with more than a thousand letters, I have warned that current capital requirements doom banks to dangerously overpopulate “safe havens” and equally dangerously under-explore the “riskier” but surely more productive bays where SMEs and entrepreneurs reside. And the regulators, as the safest of all safe havens, designated the infallible sovereigns… their paymasters.

In November 2004 FT published a letter where I said: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

And now John Plender writes about “a shortage of so-called safe assets… a stampede into sovereign bonds with negligible or negative yields — Even a modest move in the direction of historic interest rate norms could pose a threat to solvency [of] banks whose balance sheets are stuffed with sovereign debt” “Why bullish markets did nothing for bearish boards”, August 6.

An in the discussion Plender mentions that “OECD economists [have] identified flawed incentive structures as part of the reason for divergent perceptions of risk… equity-related incentives and performance-related pay…earnings per share and total shareholder return, [which] are manipulable by management.”

And Plender also brings forward “economists at the Basel-based Bank for International Settlements believe that low interest rates beget yet lower rates because they cause bubbles, followed by central bank bailouts. Their worry is that we risk trapping ourselves in a cycle of financial imbalances and busts.”

But Plender, in true FT tradition, does not say one single word about the perverse manipulation of credit markets carried out by bank regulators.

Plender mentions Andrew Haldane putting “particular emphasis on the phenomenon of “dread risk”, a term used by psychologists to describe an exaggerated sense of fear and insecurity in the wake of catastrophic events.

But, does not requiring banks to have 500% more capital when they lend to “the risky” than when they lend to “the safe”, evidence the mother of all exaggerated sense of fear and insecurity… in this case anticipating catastrophic events… a sort of pre-dread risk?

Because, that is exactly what regulators showed when, with Basel II, they required bank to hold 8 percent in capital when lending to a “risky” SME or entrepreneur, but only 1.6 against AAA rated assets… and allowed zero capital when lending to infallible sovereigns.

PS. The OECD’s Business and Finance Outlook 2015 also similarly ignores the effects of the risk-averse bank capital requirements. When referring to the “reduced bank lending [which have] affected SMEs in particular” it shamelessly limits itself to stating “credit sources tend to dry up more rapidly for small companies than for large companies during economic downturns”. 

@PerKurowski

August 06, 2015

Bank regulators are the most important pushers of shortsighted short-term capitalism

Sir, Sebastian Mallaby writes: “The US presidential frontrunner, the boss of McKinsey, and the chief economist of the Bank of England declare that capitalism is misfiring” and quotes Dominic Barton of McKinsey with: “the continuing pressure on public companies from financial markets to maximise short-term results”, usually at the expense of research and investment”, “Shortsighted complaints about short-term capitalism” August 7.

If companies cannot use investable resources, they should simply return those to the economy… and once there, the banks are the most important agents to recirculate those resources, to those who want to do something with these.

And that is where the real problem starts. Because now, with the current capital requirements for banks that are much higher when lending to what is perceived as risky than when lending to what is perceived as safe, regulators have de facto ordered banks to recirculate those resources to the old and existent economy, which is usually perceived as safer, and stay away from financing the future economy, which is usually perceived as riskier. And, if that is not short-termism, what is?

@PerKurowski

Fairness to debt burden countries and taxpayers, starts by getting rid of risk weighted capital requirements for banks

Sir, Charles Goodhart writes: “But how can one… be fair to … countries with debt burdens enlarged by the global financial crisis; and fair also to the taxpayers in creditor countries…? There is, I believe, a way to do so… real gross domestic product bonds” “Restructure all or most of Greek debt into real GDP bonds” August 6.

That might be but, writing “debt burdens enlarged by the global financial crisis”, is unfair to both debtors and taxpayers. What first needs to be done, so that these tragedies are not repeated, is to acknowledge the role the distorting portfolio invariant capital requirements based on credit risk played in causing the crisis. And then to rid the world of these that doom the safe havens to become dangerously overpopulated, and the risky but more interesting bays from being sufficiently explored.

@PerKurowski

August 04, 2015

Bank credit: In tough times there are no benefits derived from making it harder for the tough to get going.

Sir, I refer to Kadhim Shubber’s and Gavin Jackson’s report on that “Moody’s warns on lending crackdown” August 4.

Clearly the “risky” part of the economy, like SMEs, entrepreneurs and “highly indebted companies” are, as a consequence of tightening bank capital requirements, having to struggle more than others to obtain access to credit, precisely at the exact moment when we most need them to have fair access to it.

And the tightening of bank capital requirements, which lead to bank credit austerity, are usually most called for by those who oppose government spending austerity. Just read through the articles of most of your columnists over the year and you will find requests for higher capital requirements for banks going hand in hand with similar pleads of less government austerity. The most plausible explanation for that… is that it is all the result of an unconscious or conscious pro-government political agenda.

I repeat what I have argued many times over the years. Before we raise capital requirements we need to get rid of the distortionary implications of the risk weights. Let’s reduce the capital requirements like to 5 percent on all assets and then build it up over a decade to around a more reasonable 10-15 percent.

In tough times there are no benefits derived from making it harder for the tough to get going.

Also I am absolutely convinced that if banks are not distorted, bankers, pursuing maximizing the returns on bank equity, are much more able to allocate credit efficiently than government bureaucrats.

But, if bank regulators absolutely must distort, in order to show us they earn their salaries, then at least let us ask them to distort in favor of something more productive than keeping banks from failing. 

For instance let them authorize slightly lower capital requirements based on job-creation and earth sustainability ratings… so that banks earn slightly higher risk adjusted returns on equity funding what we believe should be funded, and not like now, earning much higher risk adjusted returns on equity when funding what is ex ante perceived as safe… like AAA rated securities were… like Greece was.

@PerKurowski

August 03, 2015

Citizens should question the purpose of banks, but a FT should also have a duty to forward those questions.

Sir, Saker Nusseibeh writes that citizens should question the purpose of the financial system “Systemic moral hazard is embedded in current economic view”, FTfm August 2.

Indeed, but that is mostly because the regulators never found it necessary to define the purpose of our banks, before regulating these.

With technocratic arrogance they decided that when banks lend to “safe” governments and to members of the AAArisktocracy, these should be allowed to hold much less capital (equity) than when lending to the “risky”, like to the SMEs and entrepreneurs.

That meant that banks would then in relative terms lend more and at lower rates to “safe” governments and members of the AAArisktocracy, than they would in the absence of these regulations.

And that means, almost explicitly, that regulators believe “safe” governments and members of the AAArisktocracy can use bank credit more efficiently than what SMEs and entrepreneurs can do. And that is of course pure and unabridged lunacy.

I have been questioning those capital requirements, for more than a decade, in soon 2.000 letters to the Financial Times. Long time ago I was told these were ignored because I was becoming tiresome and monotonous… as if that has anything to do with the fundaments or importance of my questions.

Again, FT why do all of you believe capital requirements for banks, those which are to cover for unexpected losses, should be higher for the risky than for the safe, only because the former present higher expected losses? I dare you to give me one single reason for it and then be willing to debate it publicly.

@PerKurowski