May 23, 2018

Europe has been way to blasé about how the divisive forces of a common Euro within a not fully integrated Europe could gather strength.

Sir, I refer to Martin Wolf’s “Italy’s new rulers could shake the euro” May 23.

On the eve of the Euro, November 1998, in “Burning the Bridges in Europe” I wrote:

“The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. The Dollar is backed by a solidly unified political entity, i.e. the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive.”

One could have expected that the fundamental menace that the Euro poses to the EU should have been in the forefront of everyone’s mind, and that much more would have been done to mitigate the dangers. But that has not really happened as its authorities wasted their time in so many other relative minutiae.

But what I never saw or knew when I wrote that article, as I had really nothing to do with bank regulations, was that bomb that was implanted in the middle of Europe, and in much of the rest of the world, that which required banks to hold more capital when lending to the citizens than when lending to the sovereign. That had to cause that excessive public sector indebtedness, which has now set the Euro problematic on steroids.

Sir, looking at what lays in front, one cannot help to think about the possibility that Brexit ends up being for Britain a very timely blessing in disguise.

@PerKurowski

May 22, 2018

If Europe’s sovereign debt is to be securitized, who’s going to earn those origination and packaging profits?

Sir, with respect to the European Systemic Risk Board —recommendations of pooling, packaging and tranching sovereign bonds from all members of the single currency into synthetic securities you opine: “Having a safe asset proposal in the mix would make it less risky, for example, to introduce a sovereign debt restructuring mechanism or risk weights for banks’ government bond holdings.” “Eurozone ‘safe asset’ is crucial to banking union” May 22.

Once securities with mortgages to the subprime housing sector in the US got a high rating, that allowed the originators of very long, very high interest and very lousily awarded mortgages, to sell these of at very low discount rates, and thereby generate huge immediate profits for them and the packagers. Did this benefit in any way the subprime sector? No! On the contrary… it got much more mortgages that it could reasonably swallow.

In the same vein, let me ask, how are subprime rated nations like Greece to benefit by having its public debt packaged together with higher rated nations like Germany? If its debt is sold off in riskier tranches, then all remains the same. If its debt remains in the safer tranches is there then not a build up of a new crisis?

Sir, what Europe does not need is to try to hide away in some new securities, the regulators’ fatal use of risk weighted capital requirements for banks, that which favored way too much sovereign indebtedness. 

What Europe, and the western world need the most is to get rid of that regulation in order to allow banks to again become banks that earn their return on equity by giving loans with calculated risk taking, and not by reducing equity.

A Systemic Risk Board that does not understand the systemic risk bad and intrusive regulations pose is a joke of a Board. 


@PerKurowski

May 21, 2018

There’s never a wrong time to begin correcting bad bank regulations, such as the current ones.

Sir, Rana Foroohar writes: “Financial crises always start the same way” and refers to “Over-confident financiers [and] lax regulators”, “The wrong time to weaken bank reform” May 21.

The 2007/08 crises resulted from overconfident regulators, those who believed so much in the capacity of credit rating agencies that, if private sector assets were rated AAA to AA, banks were allowed to hold these against only 1.6% in capital, meaning they were allowed to leverage a mindboggling 62.5 times. The financiers on their hand, much more than overconfident, were lax and did not have it in them to resist the temptations of such regulatory generosity.

Sir, just think about how much sufferings and how many unrealized dreams could have been avoided had only the following four simple questions been asked of the Basel Committee’s about their risk weighted capital requirements for banks. 

1. What? Do you really know what the real risks for banks are? If you do, why are you not bankers?

2. What? Don’t you see that allowing banks to leverage differently with different assets will lead to a new not-market-set of risk adjusted returns on equity. Are you not at all concerned this could dangerously distort the allocation of credit to the real economy?

3. What? Do you think that what’s perceived risky, that which bankers adjust to by means of lower exposures and higher risk premiums, is more dangerous to the bank system than what they perceive as safe?

4. What? A 0% risk-weight of sovereigns? That could only be explained by their capacity to print currency in order to get out of debt. But is that not also one of their worst possible misbehaviors?

The saddest part though is that 30 years after that faulty regulation was first introduced with the Basel Accord in 1988, these questions are still waiting for an answer.

Sir, there is never the wrong time to start correcting for such bad regulations. You could argue that the introduction of a leverage ratio is doing that. Indeed, but as long as the risk weighted capital requirements remain these will be influencing credit decisions where it most counts, on the margin.

And it is only getting worse. Foroohar writes “larger banks with assets ranging from $250bn to more than $2tn… will now be able to reclassify municipal bonds as “high quality assets”, making it easier for them to game the liquidity coverage ratio.” What does that signify? Those municipalities will get too much credit in too easy terms… just like Greece.

@PerKurowski

May 19, 2018

If Remainers want Britain back in EU why do they not make the proposals that would make EU more attractive to other Europeans?

Sir, Tim Harford, with respect to the Brexit referendum writes: “It was always clear that asking an absurdly simple question about an absurdly complicated decision was unlikely to work out well.” “Picking a bread-maker is like choosing a Brexit”, May 19

Really? Was the real problem not more that the “experts” expected a simple answer that agreed with their take on an “absurdly complicated decision”? Sort of like what helped Trump to be elected. 

If Britain has problems with getting out of EU, it would seem that many EU nations have even more ingrained problems with staying in EU… having to live under the ever-growing reaches of an evermore distant European Commission.

This week the European Commission tweeted: “Today, municipalities will be able to apply for €15,000 EU financing to install free wireless internet hotspots in their public space. First-come first-served!” Would that not be a perfect opportunity for Remainers to come out in full force with a “See… that is one of the thousand of examples for why so many in Britain went for Brexit”?

With or without Brexit, Europe will remain, and Britain will be a part of it. Britain could be a leading voice proposing the reforms that would allow Britain to reenter EU. And I am sure they would find much sympathy with others equally fed up with having to live under the thumbs of besserwisser technocrats. 

The best of the Winter Olympics 2018 for me was seeing Sofia Goggia singing her Italian national anthem with such an enthusiasm. There was not one bit of Europe present in her voice… and that is an indication Europe is not going in a European direction.

PS. Just in case you are curious, the worst for me at the WO-2018 was to suffer with Egvenia Medvedeva when not winning gold.

@PerKurowski

May 18, 2018

Bank regulators have clearly violated that holy social intergenerational contract Edmund Burke wrote about.

Sir, Marin Wolf writing that while “UK has messed up policy in five significant respects: growth; ageing; risk-sharing; housing; and redistribution.” argues that the focus on intergenerational equity is not helpful” “The focus on intergenerational inequity is a delusion” May 18.

In that I do not agree.

For the umpteenth time: The risk weighted capital requirements for banks, that which allow banks to leverage more and thereby earn higher expected risk adjusted returns on equity when financing what’s perceives as safe, like the present economy, houses and sovereigns; over what’s perceived as risky, like the riskier future and the entrepreneurs, is a direct violation of that very core of minimum intergenerational equity that should guide our actions.

And not only will our young pay dearly for it. Those young currently living in the basements of their parents houses will one day shout out: “Now its our turn to live upstairs, you move down to the basement!” And way too many of those elder who possess assets, like houses and shares will, when they really need, find it very hard to convert these into the main-street purchase capacity they hoped for.

I pray it will not come to that, but it is useful for everyone to look at Venezuela where their young are now all fleeing to find better opportunities abroad, while most of the elder are stuck in a society that is rotting. And from boom to bust can happen so fast.

@PerKurowski

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

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

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

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

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

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

@PerKurowski

May 17, 2018

Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 

@PerKurowski

The not globalized football world, should it not get more out of any Fifa/Uefa deals?

Sir, I refer to Arash Aassoudi’s and Murad Ahmed’s “Fifa’s $25bn shake-up sets up clash with Uefa” May 17.

Out of this $25bn Fifa proposal we read that $2.4bn (4x $600m) will be given “in support to football confederations, national organisations and smaller clubs.” 

That’s less than 10%! In these days in which so much of the richness derived from globalization gets to be concentrated in fewer and fewer hands, should that support of the excluded not be… at least 51%?

@PerKurowski

May 13, 2018

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

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

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

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

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

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

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

I have not seen anyone holding Sir Paul Tucker accountable.

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

@PerKurowski

May 07, 2018

Risk weights of 0% the sovereign and 100% to its source of strength, the citizens, is putting the cart before the horse

Sir, I refer to Professor Lawrence Summers’ “The threat of secular stagnation has not gone away” May 7.

Again, for the umpteenth time: Regulators allow banks to hold less capital against what is perceived safe, like houses and friendly sovereigns, than against what is perceived risky, like entrepreneurs. This allows banks to leverage more with the “safer” present economy than with the “riskier” future. 

And this allows banks to earn higher expected risk adjusted returns on equity when financing the “safer” present economy than when financing the riskier future, something which causes banks to give too much credit to the current economy, without giving sufficient credit to the future productive means that could generate a much needed debt repayment capacity. 

This has to result in the “slow productivity growth [and] unsound lending and asset bubbles with potentially serious implications for medium-term stability” which is of such great concern to Professor Summers. Why is this so hard to understand?

Why can renowned professors with so much voice, not be able to also understand that if you assign a risk weight of 0% to the sovereign, and one of 100% to the citizens, those who signify a sovereign’s prime source of strength, you are putting the cart before the horse? Are they too statist or, behaving like sovereigns with an après nous le déluge, just too indifferent about the future. 


@PerKurowski

May 05, 2018

What if Artificial Intelligence helps predict decently correct Portfolio Variant Bank Capital Requirements?

Sir, Tim Harford refers to “Prediction Machines by Ajay Agrawal, Joshua Gans and Avi Goldfarb [which] argues that we’re starting to enjoy the benefits of a new, low-cost service: predictions. Much of what we call artificial intelligence is best understood as a dirt-cheap prediction. “Cheap innovations often beat magical ones” May 5.

If a credit to a risky borrower is not excessively large, and carries a correct risk premium, it can provide more safety to a bank’s portfolio, than a credit to a borrower perceived as safe.

Unfortunately, and as was stated in “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions”,“Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

And so to make up for that difficulty the regulator decided: “In the context of regulatory capital allocation, portfolio invariant allocation schemes are also called ratings-based. This notion stems from the fact that, by portfolio invariance, obligor specific attributes like probability of default, loss given default and exposure at default suffice to determine the capital charges of credit instruments.”

And to justify it they argued that: “essentially only so-called Asymptotic Single Risk Factor (ASRF) models are portfolio invariant (Gordy, 2003).”


But, what if Artificial Intelligence had then allowed bank regulators to make their capital requirements portfolio variant? Many other bad things could of course have happened, but surely AI would have warned against too much exposure being built up with assets perceived (residential mortgages), decreed (sovereigns like Greece) or concocted (AAA rated securities) as safe. And also about too little exposures to what is perceived risky, like loans to entrepreneurs.

The danger is though that since we are clearly not capable to duly question human regulators’ expertize, we could end up questioning even less any Artificial Intelligence’s also quite possible mumbo jumbo. 

@PerKurowski

May 01, 2018

Sweden got to be an economic powerhouse with its banks financing “risky” entrepreneurs, not by these financing “safer” houses.

Sir, Patrick Jenkins reports: “Nordea has a core equity capital ratio of close to 20 per cent, double that of some European rivals. It can expect lesser capital demands from the ECB” “Nordic noir: the outlook darkens for Sweden’s banks” May 1.

Let us suppose that Nordea has only Basel II’s 35% risk weighted residential mortgages on its books. Then, a 20 percent capital ratio, would translate as having Nordea 7% in equity against all its assets meaning it is leveraged 14.2 times to 1.

So when we then read that in Sweden “house prices have declined 10 per cent since last summer, although in prime Stockholm the slump has been closer to 20 per cent” of course that should be enough to besides giving “Jitters about the sustainability of property prices” causing jitters about its banking sector.

I have a close relation to Sweden in that not only was my mother Swedish but I also spend my most formative years, high school and university there. So it saddens me to see what is happening. Sweden that got to be so strong by its banks financing “risky” entrepreneurs is now getting weaker by its banks mostly financing “safer” assets, like mortgages.

“Sweden’s Financial Supervisory Authority, late last year, proposed Sweden’s Financial rules [that] would mean those taking out new home loans of more than 4.5 times their salary would have to pay off an extra 1 per cent of their mortgage annually.” Are we to be impressed with that?

Stefan Ingves the Governor of Sveriges Riksbank has since 2011 been the Chairman of the Basel Committee for Banking Supervision. Why has he not proposed to stop distorting the banks allocation of credit, by requiring these to hold the same capital when extracting value and placing a reverse mortgage on the “safer” present economy, than when financing the riskier future, that the young Swedes need and deserve is financed?

In Swedish churches there was (is) a psalm (#288) that prays for: “God make us daring”. It would seem Mr Ingves never heard less sang it. 


April 29, 2018

Even perfectly perceived risks, if excessively considered, cause wrong reactions

Sir, John Authers writes that John Locke…when asked if we have an idea of the substance behind our perceptions, answered that we have “no such clear idea at all, and therefore signify nothing by the word substance, but only an uncertain supposition of we know not what”. “Economic reality is hard to fathom after years of distortion” April 28.

And then Authers argues: “Uncertainty is nothing new, particularly about the future. But it is rare for the present to be so hard to perceive as it is now. After a decade of desperate monetary measures to stave off the Great Recession, there is also a reluctance to believe what the markets are telling us, as their signals are distorted.”

At least when it comes to banks and their allocation of credit to the real economy, the signals are indeed extremely distorted, all as a result of the risk weighted capital requirements.

Bankers perceived credit risks and cleared for these by means of the size of the exposure they accepted and the risk premiums they demanded. But then came regulators and ordered that precisely those same perceived risks, should also be cleared for with the capital requirements.

With that they just ignoredthat any risk, even if perfectly perceived, leads to the wrong actions, if excessively considered.

As a result there are now way too high exposures, at too low risk premiums, to what is perceived as safe (and which therefore contains the fattest dangerous tail risks) and too little exposures, at too high risk premiums, to what is perceived as risky, like entrepreneurs.

@PerKurowski

April 28, 2018

Few things are as risky as letting besserwisser technocrats operate on their own, without adult supervision.

Sir, Martin Wolf when discussing Mariana Mazzucato’s “The Value of Everything: Making and Taking in the Global Economy” writes: “In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.” “A question of value” April 28.

Indeed. Let me, for the umpteenth time, refer to those odiously stupid risk weighted capital requirements that the Basel Committee and their regulating colleagues imposed on our banks.

Had not residential mortgages been risk-weighted 55% in 1988 and 35% in 2004 while loans to unrated entrepreneurs had to carry a 100% risk weights, the “funded zero-sum competition to buy the existing housing stock at soaring prices” would not have happened.

Had not assets, just because they were given an AAA rating by human fallible credit rating agencies, been risk-weighted only 20%, which with Basel II meant banks could leverage 62.5 times, the whole subprime crisis would not have happened.

Had not Basel II assigned a sovereign then rated like Greece a 20% risk weight, and made worse by European central bankers reducing it to 0%, as it would otherwise look unfair, the Greek tragedy would only be a minor fraction of what happened.

Had not bank regulators intruded our banks would still prefer savvy loan officers over creative equity minimizers.

Had not regulators allowed banks to hold so little equity there would not have been so much extracted value left over to feed the bankers’ bonuses.

Having previously observed Mariana Mazzucato’s love and admiration for big governments, who knows she might even have been a Hugo Chavez fan, I am not surprised she ignores these inconvenient facts. But, for Martin Wolf to keep on minimizing the distortion, that is a totally different issue. 

The US public debt is certainly the financial risk with the fattest tail risk. It was risk weighted 0% in 1988, when its level was $2.6tn. Now it is $21tn, growing and still 0% risk weighted… and so seemingly doomed to become 100% risky. Are we not already helping governments way too much?

@PerKurowski

April 27, 2018

What kind of tariffs is protectionist Michel Barnier thinking of imposing on banking and financial services provided by the City of London to Europeans?

Sir, Mehreen Khan’s, Jim Brunsden’s and Sofia George Parker’s write thatin reference to that “the EU would have more to lose from cutting off the City of London than Britain would” Michel Barnier said: “This is not what we hear from market participants, and it is not the analysis that we have made ourselves.”“Barnier dismisses UK hopes of special market access for London after Brexit” April 27.

Sir, I must confess that Michel Barnier does not qualify as my favorite EU Brussels technocrat, but with this he certainly proves himself to be a protectionist, completely in the hands of the European financial intermediaries (the aluminum and steel producers) and with little consideration to all those European consumers of financial services that might prefer using the services and the legal framework provided by the City.

What kind of tariffs is Barnier thinking of imposing on banking and financial services? Has Michel Barnier really been authorized to impose on behalf of all the European Unions his will on all Brexit negotiations?

Sincerely, I do not think Barnier has thought this thru. He might be setting off a real European capital flight to London. 

@PerKurowski

Bank regulators, get rid of risk weighted capital requirements, so that savvy loan officers mean more for banks’ ROE’s, than creative equity minimizers.

Sir, Gillian Tett referring to IMF’s recent warnings about the risks of overheating in risky loan and bonds markets; like “The proportion of US loans with a rating of single B or below (ie risky) rose from 25 per cent in 2007 to 65 per cent last year. And a stunning 75 per cent of all 2017 institutional loans were “covenant lite” writes: “it is possible — and highly probable — that non-banks are taking bigger risks, since they have less historical expertise than banks, and thinner capital buffers.” “The US has picked the wrong time to ease up on banks” April 27.

Yes, with risk weighted capital requirements banks ROE’s began to depend more on maximizing leverage, and so banks sent home many savvy loan officers and hired creative equity minimizers instead. As a result someone else had to serve “the risky”. 

But then Tett warns “Trump-era regulators” with a “it is foolish to be encouraging risky lending right now”. Wrong! It is always foolish to encourage risky lending. 

What Tett does not understand is that “risky lending” has nothing to do with a borrower being risky, and all to do with whether the lending to those perceived risky or those perceived safe, is done in such a way, with adequate exposures and risk premiums, so that the resulting bank portfolio is well balanced. 

The current extremely risky bank lending is the result of way too large exposures, at way too low risk premiums, to what is perceived, decreed or can be concocted as safe; and way too little exposures, at way too high risk premiums, to anything perceived as risky.

What regulators really should do, is to get rid of the risk-weighted capital requirements for banks. Then bank loan officers, those that could also show the non-banks the way would return, for the benefit of both the banks and the real economy.

Why do many bankers hate such possibility? Because high leverage, meaning little equity to serve, is the main driver of their outlandish bonuses. 


@PerKurowski

Could it be that we so much wish some forecasts to be right, that we are unable to see when they fail?

Sir, Miles Johnson ends his discussion of failing economic forecasts with: “It is not surprising that forecasters continue to get things wrong. What remains remarkable is that those who question the assumptions that underpin their repeatedly failing models are still treated as radicals” “Forecasters’ failings highlight the flaws in our assumptions” April 26.

Regulators, they say, based on some careful research, forecasted that what is perceived as risky is much more dangerous to our bank system than what is perceived as safe. And so they gave us risk weighted capital requirements with instance with Basel II’s risk weight of 20% to what is AAA rated and 150% to what is rated below BB-.

The 2007/08 crisis, caused exclusively by assets that because they were perceived, decreed or concocted as safe, residential mortgages, sovereigns like Greece or AAA rated securities, the banks were allowed to leverage much more with, proved without any doubt how wrong that forecast was. 

And there are many more faults with this regulations that completely distorts the allocation of credit to the real economy.

Yet the assumption that underpin that regulation is not questioned, and if someone does, like I have done persistently for about two decades, I get treated like a radical, or at least as someone obsessed that should not be given much voice. 

For instance FT’s Martin Wolf, even though in 2012 he writes: “Per Kurowski reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk”, in the same breath he holds that “it is essential to recognise that so called ‘risk-weighted’ assets can and will be gamed by both banks and regulators”. That of course means Wolf does not see this regulations as something build upon a fundamentally mistaken principle, but mostly just suffering a kind of technical glitch in its execution.

Why is this so? Perhaps it is because we all want so much our banks to be safe, so when regulators tell us the bank capital requirements are risk-weighted, we so much want that to be true that we don’t even dare contemplate the possibility that, the experts, could be 180 degrees off the mark.


@PerKurowski

The severity of Greece’s financial crisis was caused, directly, by totally inept bank regulators

Sir, Jim Brunsden, Mehreen Khan and Kerin Hope report “Greece is approaching a momentous moment: the end of eight years of international bailouts that forced the country into unprecedented belt-tightening in exchange for a cash lifeline from eurozone governments and the IMF” “Eurozone and IMF are still to agree a package as deadline approaches” April 27.

What I find impossible to understand is how European bank regulators, and European central bankers, have been able to hide from the Greeks the fact that they directly caused that crisis to be so much worse than it would have been, had they not meddled.

For the purpose of the capital requirements for banks, they assigned Greece’s public debt a 0% risk weight, and this as if Basel II’s credit rating dependent minuscule risk weight of 20% was not bad enough.

Would Greece have found itself in such troubles had banks needed to hold the same capital when lending to the Greek government than when lending to Greek citizens? Absolutely not!

Those retirees protesting against pension reforms, and all those young Greeks who have had to left their country in order to stand a better chance in life, should now all jointly be protesting in Basel against the Basel Committee of Banking Supervision, the Financial Stability Board and all bank regulators.


@PerKurowski

April 25, 2018

Profits obtained under the protection of an IPR should be taxed higher than when obtained competing naked.

Sir, Martin Wolf discusses the vital topic of how intellectual property rights could, simultaneously, be agents that help promote the ideas and inventions needed for a better future, and an obstacle to competition. “Let knowledge spread around the world” April 25.

I have also grappled with this issue and although it might surely not be the only option, for a long time I have thought that placing a special tax on profits obtained under the coverage of an IPR, could help to bring forward that moment when sharing out freely the rights, instead of exploiting these up to the tilt, would make more business sense.

Also what justice is it in that those who have to compete completely naked in the market, should be taxed at the same rate as those who the society defends by defending their IPRs?

By the way, that special tax on IPR profits should go to partially fund, by means of a Universal Basic Income what could be considered as a Human Heritage Dividend.

@PerKurowski

April 14, 2018

Predictability, in bank regulations, is more a dangerous threat than help

Sir, I refer to Robin Wigglesworth’s excellent discussion on the difficulties and hard choices central banks face when communicating their feelings and policies “Central banks might benefit from a healthy dose of ‘constructive ambiguity’”. May 14.

But let me focus (for the umpteenth time) on the concluding note “Predictability may be a hindrance rather than a help”

The Fed’s Governor Laid Brainard, in a recent speech “An Update on the Federal Reserve's Financial Stability Agenda” said: “The primary focus of financial stability policy is tail risk (outcomes that are unlikely but severely damaging) as opposed to the modal outlook (the most likely path of the economy).”

That is how it should be, but it is not! That the riskiness of bank assets, for instance with the help of credit rating agencies, could be somewhat predicted, tempted regulators into creating risk weighted capital requirements for banks; but that same “predictability” also blinded them completely to the fact that the safer something is perceived, the more dangerous does its fat-tail-risk become. For instance they assigned a risk weight of only 20% to the AAA rated and one of 150% to that which was rated below BB-. Is not the fat-tail-risk of what has been rated below BB- almost inexistent?

Governor Leal Brainard also writes: “Treasury yields reflect historically low term premiums--. This poses the risk that term premiums could rise sharply--for instance, if investor perceptions of inflation risks increased.” 

Indeed, but to that we must also add the possibility of the investor perceptions of Treasury infallibility changes for the worse.

When in 1988 the regulators, with Basel I, decided to assign a 0% risk-weight to some sovereigns they painted these into a corner. If that risk weight is not increased, then sovereigns will become, sooner or later over-indebted, and risk will grow until it hits 100%. If that risk weight is increased, ever so slightly, markets will be very scared. How to get out of that corner is the most difficult challenge central banks and bank regulators face. Let us not forget that in 1988 US debt that was $2.6 trillion. Now it is US$21 trillion, growing, and still 0% risk weighted.

PS. The only way to solve the 0% sovereign risk weight conundrum that I see, is to increase the leverage ratio applicable to all assets, until that level where the risk weighted capital requirement totally loses its significance.

PS. Brainard also stated “Regulatory capital ratios for the largest banking firms at the core of the system have about doubled since 2007 and are currently at their highest levels in the post-crisis era.” Regulatory capital ratios, when risk weighted, might mean zilch.

@PerKurowski

April 13, 2018

Does not “safe(ish) activities such as holding government bonds” contain the fattest most dangerous tail risks?

Sir, Gillian Tett writes “the Fed and the Office of the Comptroller of the Currency introduced proposals to “tailor leverage ratio requirements to the business activities and risk profiles of the largest domestic firms”. In plain English, this means banks can operate with a little less capital to absorb losses, provided they focus on safe(ish) activities such as holding government bonds.” “Trump’s mixed record on rolling back bank reform” April 13.

The Fed’s Governor Laid Brainard, in a recent speech “An Update on the Federal Reserve's Financial Stability Agenda”said: “The primary focus of financial stability policy is tail risk (outcomes that are unlikely but severely damaging) as opposed to the modal outlook (the most likely path of the economy).”

So let me ask: What is the tail risk of “safe(ish) activities” compared to that of riskier activities?
How fat or dangerous is the tail risk of what is rated below BB-? Very skinny indeed.
How fat or dangerous is the tail risk of what is rated AAA? Very, very fat indeed.

Government bonds? When in 1988 the regulators, with Basel I, decided to assign a 0% risk-weight to some sovereigns they painted themselves into a corner. If that risk weight is not increased, then sovereigns will become, sooner or later over-indebted, and their risk will grow until it hits 100%. If that risk weight is increased, ever so slightly, markets will be very scared. How to get out of that corner is the most difficult challenge central banks and bank regulators face. Let us not forget that in 1988 US debt that was $2.6 trillion. Now it is US$21 trillion, growing, and still 0% risk weighted.

PS. The only way to solve the 0% sovereign risk weight conundrum that I see, is to increase the leverage ratio applicable to all assets, until that level where the risk weighted capital requirement totally loses its significance.

@PerKurowski

April 11, 2018

The US might be an SOB of a superpower, but it is our (or at least mine) SOB superpower.

Sir, Martin Wolf writes: “China is, not the real threat. The threat is the decadence of the west, very much including the US — the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth, and the sacrifice of long-term investment to private and public consumption. It is indeed a tragedy that the best way we could find to escape from a financial crisis was via monetary policies that risked promoting new bubbles. We could be better than this.” “The rivalry that will shape the 21st century” April 11.

On the “sacrifice of long-term investment to private and public consumption” I could not agree more. But that is precisely why I have been attacking, day and night, obsessively, the risk weighted capital requirements for banks. These make our banks favor way too much the financing of the present “safer” consumption (houses-governments) and stay away, way too much, from financing the “riskier” future production (entreprenuers). Unfortunately too many, Martin Wolf included, have been indifferent to that truth.

But, that said, on the first part “the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth”, is China really better than the west or the US? 

I don’t think so, but even if it was so, when push comes to show, there comes a point when you have to decide what superpower you prefer. I have no doubt preferring the west, the US… though Graham Allison of Harvard seems to harbor some doubts on that arguing that “China rivals the US in…ideology”.

In what I entirely agree with Wolf is when, explaining it so well, he states “The idea that intellectual property is sacrosanct is wrong. It is innovation that is sacrosanct. Intellectual property rights both help and hurt that effort. A balance has to be struck between rights that are too tight and too loose”

Yes, and for years I have suggested that balancing could start by taxing the profits obtained when competing protected by intellectual property rights, at a higher rate than profits derived from competing naked in the market. And since what becomes protected with IPRs is the last leg of our human heritage inventiveness, those taxes should perhaps also help to fund a Universal Basic Income, something which would be a de facto social dividend.

PS. That said, when Wolf says “the US can huff and puff about Chinese theft of intellectual property” then I am not sure really which SOB is Wolf’s favorite superpower.


@PerKurowski

April 06, 2018

Whether pension plans are based on defined benefits, defined contributions or a mixture thereof, in order to deliver, they all depend on the economy being healthy.

Sir, I refer to Martin Wolf’s “The case for an alternative pensions model” April 6.

For decades I have sustained that the best pension plan that exists, is to have loving children working in a functional and reasonably healthy economy. And that long before Venezuela proved how good pension plans could come rapidly to absolute naught by irresponsible governments.

If the economy is in shambles when pension fund assets have to be converted into purchasing capacity, it does not matter whether these are based on defined benefits, defined contributions or a mixture of these.

With risk weighted capital requirements for banks that favor an over-indebtedness resulting from financing the "safer" present consumption, like houses, over the financing of riskier future production, like entrepreneurs, there will be no economy capable to deliver even a fraction of what is currently expected from pensions.

Wolf refers to the importance to sharing “the risks among a very large group of people…across generations”. Indeed but those now young will tomorrow ask Wolf and his generation… why did you not allow banks to share in the risk taking needed for us to have a future?” and they might with justification give their elders the finger.

Currently, having already to live in the basements of their parents houses because of the lack of jobs, the minimum the young today will hold tomorrow is: “Mom, dad, you move downstairs, its our turn to live upstairs!”

PS. Yes, I am obsessive about the distortions that the risk weighted capital requirements for banks cause in the allocation of bank credit to the real economy, but Martin Wolf, for less worthy reasons, is even more obsessive when ignoring it.


@PerKurowski

March 31, 2018

The “midlife crisis” of Generation X or the Millennials, could be piece of cake when compared to what seems to await for them down the years.

Tim Harford, making reference to a new research paper from Angus Deaton, Nobel laureate in economics, argues that “people who would have their wellbeing most improved by a cash injection are the middle-aged, people between their forties and their sixties.” “A monetary remedy for the midlife crisis” March 31.

It is a fun argument for Harford to use when “I will have a word with my father and my children”.

But what would Harford say if the answer he got from his children was: “Daddy, in terms of where you find yourself in your lifecycle, you are the one living most over your means… so no cash for you… spend less… save more (so that you might leave some to us as your father left to you)… and for God’s sake get rid of those risk weighted capital requirements for banks that hurt us so much.”

That mentioned piece of regulation, by favoring banks to finance the present safer consumption over the “riskier” future production, has already placed a reverse mortgage on the current economy, which is jeopardizing everyone’s future.

And also, since it amounts to a gross violation of Edmund Burke’s holy intergenerational contract, I would suggest Harford and his generation begin to prepare a very good defense speech for when they will have to respond to their children why they allowed that to happen.

And Harford, as a retiree, or at least his generation of retirees, will also suffer because, as I have argued so many times, there is no better pension plan than having children who love you and are able to work in a reasonable healthy economy.

Sir, my grandchildren will at least know how much their grandfather, obsessively, fought against that crazy risk aversion. Will yours?

PS. If you dare to see how the elderly could so unexpectedly for them be suffering horrors, have a look at what is happening in Venezuela.

March 25, 2018

Our need to concern ourselves about the use of our personal data goes much beyond what’s in the Facebook/Cambridge Analytica entanglement

Sir, I refer to Hannah Kuchler’s “The anti-social network” March 24 and all other reports that will pop up on the Facebook/Cambridge Analytica entanglement.

For a starter, why should we be so concerned with Facebook losing control of data to third-party developers, when Facebook has all that data and even more on us, and on which we have handed over the control to Facebook?

Then, if there is something that should be of the greatest concern to us citizens, that is the possibility of Facebook and similar teaming up with governments in “Big Brother is watching you, and makes profits on you all” joint ventures.


I pray there are no secret negotiations going on between Venezuela’s Maduro and Facebook’s Mark Zuckerberg. I mean if Goldman Sachs’ Lloyd Blankfein could finance such an odious human rights violating regime, without any important social sanctioning of him, why should not Zuckerberg thinks about selling data to it too?

Sir, it is clear that we have need for independent entities such as central banks, then an ironclad independency of an Agency Supervising Our Personal Data Usage, seems to me to be the mother of the needs for independency.

Down with all "Big Brothers are watching you". And it does not matter whether these are Public, Private or PPPs (Public Private Partnerships)!

Of course the usage of our data supervisory agency must be managed by wise and common sense possessing individuals and not by dummies like those of the Basel Committee on Banking Supervision who are so not only convinced that what is perceived as risky is more dangerous to our bank system than what is perceived as safe, but also so easily manipulated by the banks.

PS. I forgot the first tweet I made on this, namely: How do we know this is not all fake news created in order to provide some polarization profiteers with new marketing material?

PS. Sir, I could be adding new comments to this post… so you might want to come back now and again to have a look at what’s in it.

PS. We must keep the ambulance chasers and the redistribution profiteers out of the business of fining the social media. All fines should go to fund a citizen’s Universal Basic Income

@PerKurowski

March 21, 2018

Preferential access to bank credit for those buying houses have also turned houses in attractive investments, and so a house is no longer just a house

Sir, I refer to Sarah O’Connor’s “Cities only work if they accommodate rich and poor” March 21.

She is correct although it would be more precise saying that cities only work if they accommodate all those workers required to make a city work.

Here is my take on this issue.

By politicians and regulators giving so much preference to the purchase of houses, the prices of houses have been inflated beyond reflecting the need of houses, and so have also turned houses into attractive investments. That has created a financial disequilibrium because most workers who would anyhow struggle to pay for just houses, will find it impossible to service mortgages that also reflect the value of investment assets.

Most politicians would naturally want to be seen as helping people buy affordable houses, but they do wrong in that. What they should do is to help people to be able to afford housing, something which is absolutely not the same thing.

Before we clear out this distortion, our cities will suffer from what O’Connor’s describes. Alternatively, current house asset owners, might be required to start building houses where they allow the indispensable workers to live at a reduced rate… something that could affect the value of their houses.

In many places that are too distant for the firefighters to arrive in time, we have already heard of building houses in order to provide homes close by to these.

@PerKurowski

Bank regulators violated both the efficient markets hypothesis and the rational expectations assumptions.


Wolf writes: “David Vines and Samuel Wills explain… the core macroeconomic model rested on two critical assumptions: the efficient markets hypothesis and rational expectations”

Bank regulators, those who should rationally be more weary of the unexpected, by basing their capital requirements on what was perceived risky, that which bankers were assumed to manage efficiently and rationally, made efficient allocation of bank credit impossible, and so both those critical assumptions were violated.

Wolf writes: “We need also to understand the risks of crises and what to do about them. This is partly because crises are, as the Nobel-laureate Joseph Stiglitz notes, the most costly events”. 

I disagree entirely with this limited Monday morning quarterback view. To measure the real cost we have to measure the full boom and bust cycle. Having, like now, bank regulations that favor banks financing the “safer” present consumption (houses), over the “riskier” future production (entrepreneurs), is a certain way to minimize the returns from our current circle of life.

Wolf writes: “Doctors’ first response to a heart attack is, after all, not to tell the patient to go on a diet. That happens only after they have dealt with the attack itself.” 

True, but even more important then that, is to correctly diagnostic the illness. In this case, the doctors, the bank regulators, do not want the diagnosis of missregulation to occur, so they are perfectly happy with most of the world blaming bankers or arguing deregulation.

Wolf writes: “We may never understand how such complex systems as our economies— animated, as they are, by human desires and misunderstandings — actually function. This does not mean that attempting to improve understanding is a foolish exercise.”

This is precisely what I have been trying to do with thousands of letters to the Financial Times and Martin Wolf, looking to explain how incredibly faulty the current risk weighted capital requirements for banks are, only to be silenced by FT and classified as obsessive by Martin Wolf.

Yes Sir, I admit being obsessive about this all, especially since I know the future of my children and grandchildren are affected by bad regulations. But, in his keeping mum on all this, Wolf is just as obsessive, I believe though because of much less worthy motives.

@PerKurowski

March 20, 2018

A Universal Basic Income has much more to do with being able to say, “Yes, here I come!” than with a freedom to say, “No, I prefer to stay in bed”.


I refer to Tim Harford’s conversation with Rutger Bregman on the subject of a basic income, while bouldering. “Rutger Bregman: ‘Basic income is all about the freedom to say no’” March 20.

Sir, look at Venezuela. Believe me when I say that 40% of the poorest of my homeland received less than 15% of what they should have received the last fifteen years, had our net oil revenues just been shared out equally among all Venezuelans. And then you might beguine to understand my deep resentment with any redistribution profiteers. To bypass this kind of profiteers, in abundance all over the world, is in itself a reason more than enough to justify a Universal Basic Income.

That said, in 2012, before I was censored in Venezuela, and based on the lack of jobs I had begun visualizing in 2003, I also wrote an Op-Ed titled “We need decent and worthy unemployments”. That de facto calls out for a UBI, before it is too late and our social structures break down in favor of the many aspiring Hugo Chavez and Nicolas Maduro of this world.

But Bregman argues: “OK, so basic income is all about the freedom to say no. That’s a privilege for the rich right now. With a basic income, you can say no to a job you don’t want to do. You can say no to a city in which you no longer want to live. You can say no to an employer who harasses you at work . . . that’s what real freedom looks like.”

And there I have to say no! That sounds to me like a spoiled brat’s view about what a basic income should mean. Such a Universal Basic Income becomes, almost by definition, financially unsustainable. I argue instead for a UBI that provides you with an assistance to get out of bed in order to reach up to whatever the spreading Gig economy has to offer you; but not so large so as to allow you to stay in bed, because that will sure make others refuse to pay for what the UBI might take.

Sir, every time I hear someone offering more than what a UBI can sustainably offer, I feel I we could be in the presence of a redistribution profiteer out to sabotage it, all in order to defend the value of his franchise.

PS. The article has that “A basic income [could be handed out] through the tax system as a negative income tax.” Not so. A tax credit that you start losing the minute you step out of bed to work, is not an unconditional Universal Basic Income.

PS. When Rutger Bregman opines “What’s the biggest injustice in the world right now? It’s pretty easy to see. It’s borders: apartheid on a global scale.” I would have asked. If there are no borders, how much in UBI do you think your homeland would accept to pay to any immigrant?


@PerKurowski

March 17, 2018

In not listening sufficiently to the European people, which includes the British, resides great risks for the two technocrats negotiating Brexit

Sir I refer to George Parker and Alex Barker discussing Michel Barnier and David Davis, “Meet the Brexit negotiators” March 17.

For me the best of the Winter Olympics 2018 was seeing Sofia Goggia singing her Italian national anthem with such an enthusiasm. I am sure Europe has not been able to remotely capture the hearts of Europeans in such a way; and the reason for that must foremost be the technocratic haughtiness of Brussels.

I have not the faintest idea if it rests on some real event, it most probably doesn’t, but the most powerful moment depicted in “The darkest hour”, was when Churchill journeyed the London Underground to hear the voice of regular people in the subway.

And that is what I have a feeling neither Davis nor Barnett have done enough of. Whatever the result of Brexit, they might be in for a great surprise, because, much more than arteries and veins are at stake for Europe, including Britain, it is the heart that has to be nurtured and cared for.

What if for instance to Sofia Goggia the relation Italy-Britain is much more important than the relation Italy-EU-Britain?

I have no doubt those who voted for Brexit really wanted more out of Brussels than out of Europe... because that I can understand.

Sir, you don’t have to go underground and travel subways to know what people might want. Some well designed, not biased, public opinion research on the wished and not wished for outcomes of Brexit, in all countries involved, would be the minimum I would have required before any first Brexit meeting.

PS. Just in case you are curious, the worst for me of the Winter Olympics 2018, was having to suffer with Egvenia Medvedeva when not winning her gold.

@PerKurowski

March 16, 2018

So now Brussels wants to join forces with Facebook, Google and alike, in order to also extract value from our personal preferences.

Sir, Mehreen Khan, Alex Barker and Rochelle Toplensky report that “Brussels is thinking about a “levy, which is likely to be set at a rate of 3 per cent… raised against advertising revenues generated by digital companies such as Google…fees raised from users and subscribers to services such as Apple or Spotify, and income made from selling personal data to third parties… it will raise about €5bn a year.” “Brussels proposes levy on Big Tech digital revenues” March 16.

For years I have argued that we users should have right to charge something for our preferences disclosed on the web, not only because that could yield a partial funding of a Universal Basic Income scheme, but, even more importantly, because that would help to limit the bothering and the waste of our limited attention span.

But seemingly Brussels wants to hear nothing about that, they as self appointed redistribution profiteers, want in on that revenue stream.

It is just like if governments, instead of helping to rid ourselves of the fastidious robocalls selling us all kind of products and services, would now share the incentives to push those calls even more.

Sir, though I do not live in Britain, or in Europe for that sake, I was pretty sure I would not vote for a Brexit… but every day that passes, and I read about things like this, the less sure I am of that.

@PerKurowski

March 09, 2018

Ex post dangers are inversely correlated to ex ante perceptions of risk.

Sir, Stephen King writes: “One of the main “costs” of global economic success… is excessive risk taking. Put simply, the good times don’t tend to last because we start to do stupid things that bring them to an end. Until the equity market wobbles in early February, most investors appeared to be as complacent about potential risk as they had been ahead of the crisis.” “Global good times make the world act stupidly” March 9.

Is that really excessive risk taking, or is not more a belief that there is little risk?

It is surprising how much ex post dangers get to be confounded with ex ante perceptions of risk.

The most dramatic example of that are the bank regulators who, in Basel II, assigned a risk weight of 150% to the below BB- rated, that which everyone knows is risky, and only of 20% to the AAA rated, that which everyone can so dangerously believe is very safe?

That our banks have landed in the hands of such mentally feeble minds as those of the Basel Committee, is indeed a tragedy.


Per Kurowski

March 07, 2018

There is not too much need for banks to game regulations when regulators have already gamed these so much.

Sir, John Plender addresses correctly many current concerns with the financial system in general and with banks in particular “Beware the threat of low-quality debt and opaque shadow banks” March 7.

But when he writes: “Remember, among the many things that lay behind the financial crisis of 2008-9 was the banks’ urge to game the Basel capital adequacy regime”, then I just have to step in.

There was no need to game regulations that had already been so much gamed by the regulators. Basel II, with its standardized risk weights, risk weighted any private sector carrying AAA to AA ratings with 20%, residential mortgages with 35% and, with much solidarity; European regulators risk weighted Greece 0%.

Translation: Based on the basic capital requirement of 8% banks needed to hold 1.6% in capital against the AAA to AA rated, 2.8% against residential mortgages and 0% against loans to sovereigns, like Greece.

Translation: Banks were therefore allowed to leverage their capitals 62.5 times with assets rated AAA to AA rated, 35.7 times with residential mortgages and limitless against loans to sovereigns, like Greece.

Also had regulators required banks to hold 8 percent against all assets the wriggling room for gaming would have been much reduced.

The risk weighted capital requirements for banks are most certainly the most absurd regulation concocted ever. It only guarantees that banks will dangerously overpopulate safe havens against especially little capital; and that those risky bays where for instance entrepreneurs are usually found, and that need to be explored for our economy to thrive, will not be sufficiently funded.

This should have been absolutely clear for more than a decade but yet, this is being obsessively ignored by most.

@PerKurowski

The Basel Committee’s tariffs of 35% risk weight on residential mortgages and 100% on loans to entrepreneurs, is pure protectionism.

Sir, Martin Wolf, with respect to President Trumps’ indication that “he would sign an order this week imposing global tariffs of 25 per cent on steel and 10 per cent on aluminum” writes “This is a purely protectionist policy aimed at saving old industries” “Trump’s follies presage more protectionism” March7.

Absolutely! I could not agree more. But what I cannot understand is why Wolf does not react in the same way against the protectionism imbedded in the bank regulators’ risk weights? For instance is not a 35% risk weight on residential mortgages and of 100% risk weight on loans to entrepreneurs represent even a worse protectionism than Trump’s?

That protectionism allows banks to leverage their capital 35.7 times with residential mortgages and only 12.5 times with loans to entrepreneurs.

That protectionism has banks avoiding financing the "riskier" future in order to refinance the older "safer present". Does that not sound extremely dangerous?

PS. And a 0% risk weight of the sovereign and 100% the citizens, is that not the mother of protection of statism?

@PerKurowski

March 06, 2018

Beware, the more you trust data, the more you have to be absolutely sure about how to interpret it, and about what to do with it.

Sir, John Thornhill writes: “In his Alan Turing Institute lecture, MIT professor Sandy Pentland outlined the massive gains that could result from trusted data… the explosion of such information would give us the capability to understand our world in far more detail than ever before”, “Trustworthy data will transform the world” March 6.

Indeed, but that also leads to other bigger dangers, not only because we might trust that trusted data too much, but also because we might not know how to interpret or what to do with that trusted data.

Like for instance the regulators with their current risk weighted capital requirements for banks. These establish that the riskier an asset is perceived the larger the capital a bank has to hold against it. Does that make sense? Absolutely not!

It is not if the perceived risk is correct, meaning the ex ante risk perceived ends up being the real ex post risk, that poses any major danger for our banking system. It is if the risk perceived is incorrect, that the real big dangers arise. And, of course, the safer an asset is perceived, and the more bankers trust that perception to be right, the longer and the faster it can travel down the dangerous lane of wrong perceived risks.

What detonated the most the 2007 crisis? The securities backed with mortgages to the subprime sector rated AAA by “trustworthy” credit rating agencies, in fact so trusted that the Basel Committee, with Basel II, allowed banks to leverage 62.5 times their equity with such “safe” assets.

@PerKurowski

March 05, 2018

In terms of a short-termism that harms the long run, few are as guilty as current bank regulators.

Sir, Jonathan Ford quote US academic Lynn Stout with “The pressure to keep share prices high drives public companies to adopt strategies that harm long-term returns: hollowing out their workforce; cutting back on product support and on research and development; taking on excessive risks and excessive leverage; selling vital assets and even engaging in wholesale fraud.” “Shareholder primacy lies at heart of modern governance problem” March 5.

Indeed, but I hold that low investments and poor productivity is also the result of regulators’ risk weighted capital requirements for banks based on ex ante perceived risks. These focuses on making the banks safe today, at the price of making it all worse off tomorrow, ex post. How? Because they dangerously push banks to overpopulate, against especially little capital, those safe havens that have always been the main threats to our banking systems; and because they keep banks from exploring those risky bays, those with entrepreneurs and SMEs, those that could give us the growth and the jobs of tomorrow.

@PerKurowski

March 03, 2018

In terms of estrogen and testosterone, are there differences between bank exposures to what is perceived risky, and risky excessive exposures to what is perceived as safe?

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” Mark Twain

Sir, Cordelia Fine writes: “Risk management in financial institutions is too important to be guided by scientific ideas well beyond their sell-by date. Blaming financial misadventures on a testosterone-fuelled male drive distracts us from what’s more likely to make a difference: regulation and culture. The best in-house antidote for bankers selling junk products and regulators bending to conflicts of interest isn’t women; it’s a dismissal slip”, “The Testosterone Rex delusion” March 3.

Absolutely! But with reference to the risks taken on by the banks that caused the 2007/08 crisis, that dismissal slip should foremost be given to regulators for having the ex ante perceived risks of banks assets substitute for the ex post dangers to our banking system.

And with reference to the absurd low response of the economy to the extremely high stimulates provided, the regulators should also be given that dismissal slip, for ignoring the purpose of banks, something that includes the efficient allocation of credit to the real economy.

Fine references Swedish journalist Katrine Marçal with whether “an investment bank named Lehman Sisters could handle its over-exposure to an overheated American housing market.” That is an ex post description that has little to do with the ex ante perception of the risks, and clearly less to do with bankers wanting to lend when it rained.

If some testosterone is needed to understand that risk-taking is the oxygen of development, and so the need for banks to also lend to those perceived as risky, like to entrepreneurs, then the regulators showed a fatal lack of it.

Their risk weighted capital requirements, more ex ante perceived risk more capital – less risk less capital is as dangerously nonsensical as can be. These only guarantee that when the true risks for our banking system happens, namely the dangerous overpopulation of safe havens, banks will stand there with especially little capital.

By allowing banks to leverage much more with assets perceived, decreed or concocted as safe, like AAA rated securities, like residential mortgages, like sovereigns (Greece) they allowed banks to earn the highest expected risk adjusted returns on equity on what was perceived as safe. Mark Twain could have said that made bankers wet dreams come true; and that was, while playing, the music to which Citigroup’s Chuck Prince held bankers had to dance.

And so, since what the members of the Basel Committee and the Financial Stability Board and most of their colleagues have really proven, is to be suffering from an excessive risk aversion, what would then Cordelia Fine opine, in terms of testosterone and estrogens?


Here is an aide memoire on the major mistakes with the risk weighted capital requirements

@PerKurowski

March 02, 2018

“Relax” or “tighten” has little to do with better regulation of US’s banks. Revise, correct and simplify, is what it should all be about.

Sir, I refer to Hal Scott’s and Lisa Donner’s discussion “Head to head: Should the US relax regulation on its big banks?” March 2.

Hal Scott writes: “There is empirical evidence that higher bank capital requirements cut lending and economic growth. A recent Fed paper concludes that a 1 percentage point rise in capital ratios could reduce the level of long-run gross domestic product growth by 7.4 basis points.”

And Lisa Donner writes: “Increased capital requirements lower the return on equity and, by extension, the bonuses linked to it. The desire of a small number of very wealthy people to become still richer should not drive public policy.”

They both, obviously each one from to the point of view of their respective agendas are correct in recognizing that capital requirements have clear effects. But then, as is unfortunately the current norm, they both ignore the problem of the distortions in the allocation of credit that different capital requirements produce.

And, if there is any problem in current bank regulations that needs to be tackled, that is getting rid of those distortions. If there is one analysis needed that is whether the bank’s balance sheets correspond with the best interests of our economies. The answer would be “NO!”

Scott asks: “Do we really want banks to hold enough capital to survive events that have no US historical precedent? If such an extreme economic event did occur, would any amount of capital be enough to withstand the panic it could trigger?”

Ok, agree, but then why should we want our banks to keep especially little capital when such events occur? Like when 20% risk weighted AAA rated securities exploded?

Scott, mentioning stress tests that depend on secret government financial models to predict bank losses argues: “avoid ‘model monoculture’ in which every bank adapts its holdings in order to pass the tests and they all end up holding assets the government model favors. A diversity of bank strategies is preferable given that risks are hard to predict.”

Absolutely and that is why, April 2003, as an Executive Director of the World Bank I held "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 stress tests, by focusing too much on the risk flavor of the day, as I have written to you before, are in themselves huge sources of systemic risk.

Scott informs “The living wills process requires banks with more than $50bn in assets to hold minimum amounts of “safe” assets; currently this stockpile totals more than $4tn in government debt”

Holy moly, $4tn is close to 20% of all US public debt. Is there really no interest for trying to figure out where real rates on US government debt would be if banks were not given the 0% risk-weight incentives for these debts, or, alternatively, be forced by statist regulators to hold lots of it?

Donner argues: “There is no fundamental trade-off between sound regulation of the financial system and shared prosperity. Quite the opposite. Even as tighter bank capital and liquidity requirements were phased in after the crisis, bank credit to the private sector has surged to new heights as a percentage of global output.”

But really, is that credit surge an efficient one? Are banks financing enough the “riskier” future, or are they mostly writing reverse mortgages on our “safer” present economy? 

Sir, what kind of crazy model could hold that economic growth is the result of banks being able to earn their highest risk adjusted return on equity on what is perceived, decreed or concocted as “safe”, and so avoid lending to “risky” entrepreneurs? 

@PerKurowski

February 26, 2018

Bank regulators could derive valuable lessons from pension scheme difficulties.

Sir, Jonathan Ford while discussing Carillion’s pension schemes writes: “deficit repair should reasonably leave space for the company to foster future growth, and thus preserve the ongoing viability of the sponsor.” “Carillion’s pension crisis defies any magic legal cure” February 26.

Absolutely. But does that not apply to bank regulations too? As is the risk weighted capital requirements give banks huge incentives to stay away from financing the “riskier” future, like entrepreneurs, in order to refinance the safer present, like houses.

And Ford adds: The worst outcome would be one that simply encouraged trustees to “de-risk” schemes further by purchasing highly priced gilts to protect themselves against mechanical increases in short-term liabilities caused by falling market yields — a pro-cyclical practice known as “liability-driven investment”.

In essence that is what the risk-weighted capital requirements do. They doom banks to end up gasping for oxygen in dangerously overpopulated safe-havens against especially little capital, leaving the riskier but perhaps more profitable bays unexplored.

Ford argues: “It’s not clear though what any “tough new” rules could have done to help this messy situation.”

I know too little about Carillion but, what I do know, is that pension funds in general, government’s included, have been way too optimistic when estimating potential real rates of return in the order of 5% to 7%. 3% would be more than enough of an optimistic real rate of return, given the so many unknown factors out there.

@PerKurowski