September 26, 2016

The absurdity of Mario Draghi’s leadership is even worse when considering his close connection to bank regulations

Sir, Wolfgang Kuhn writes: “Mario Draghi, the president of the European Central Bank, relies on bank lending to stimulate the economy but criticises “an excess of eurozone lenders” (“Draghi blames ‘over-banking’ for low profits”, September 23). He worries about systemic risks of big financial institutions but he wants to get rid of small ones.” “Draghi’s leadership is a cause for concern” September 26.

Indeed, but let us try to understand Mario Draghi. Besides being the president of ECB he was once the chair of the Financial Stability Board and is the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision.

So, with his bank regulator hat on, Draghi might think that if the whole banking system was reduced to some few Too Big To Fail banks, then his troubles would be over.

Jest aside, Draghi’s close link to bank regulations makes it even so much worse. Draghi should know that the risk weighted capital requirements for banks stops bank credit from being allocated efficiently to the real economy, and that is probably the greatest absurdity with him. He injects liquidity, and then he stops it from reaching “the risky”, like SMEs and entrepreneurs.

I don’t know why, but in the case of Mario Draghi (and other regulators) I often get the feeling that some Jerzy Kosinski - Being There - Chauncey Gardener - Chance the gardener characters, have somehow managed to infiltrate the higher spheres of finance.  They are walking systemic risks!




September 25, 2016

Anything that might weaken the future real economy, destroys pensions which depend more on tomorrows than on todays

Sir, Tim Harford argues “it’s far from clear that the Bank really is destroying pensions. It is true that low interest rates make future obligations loom larger in today’s company accounts. This creates a problem for any pension scheme. But, on the other side of the equation, low interest rates have boosted the value of shares, bonds and property and thus the value of most pension schemes” “Carrots with bite” September 24.

What? Does the Undercover Economist believe that lifting short-term the values of shares, bonds and property has much to do with the long-term value of those assets when they need to be liquidated so as to fulfill retirement expectations? 

Harford writes “Pensions campaigner Ros Altmann recently launched an eye-catching attack on the Bank of England for paying generous pensions to its own staff while undermining everyone else’s retirement plan.” Of course central bankers, and bank regulators, should be held much more accountable for what they do to the economy… and not only by pensioners but also by those needing the jobs that Andy Haldane comments with: “I sympathise with savers but jobs must come first.”

The risk weighted capital requirements, which give banks clear incentives to only refinance the safer past and stay away from financing the riskier future, will hurt both the pensioners when trying to sell assets into a sinking economy, and the young who need jobs in order to at least conserve an ilusion of a decent retirement. 

Harford writes: “The basic principle for any incentive scheme is this: can you measure everything that matters? If you can’t, then high-powered financial incentives will simply produce short-sightedness, narrow-mindedness or outright fraud.”

Harford should really read a recent working paper published by the ECB, “The limits of model-based regulation”. That describes what should go wrong, if you allow banks, by mean of their own complex risk models, to set their own incentives. Perhaps with that Harford who like so many other with close to willful blindness trusted Basel’s risk based regulations, will see that some other than little me, are now reluctantly beginning to have some serious doubts.

@PerKurowski ©

Could Gillian Tett possibly find something positive in removing the incentives for banks to lend to SMEs and entrepreneurs?

Sir, Gillian Tett, discussing whether to have or not to have bins, as these could be used by terrorists writes: “Losing them shows …– that trust and confidence can unravel in the face of terrorism and fear. Indeed, the symbolism is so stark that I am tempted to argue that it is a mistake to “give in” by removing those bins; in statistical terms, the risk of actually dying in a terrorist bomb attack is exceptionally small.” “Don’t throw our bins away” September 24. 

Well, the risk of having a bank crisis resulting from excessive exposures to what was ex ante perceived as risky, is exceptionally small, I would say none. Yet bank regulators clearly gave in to some imagined fear and decided the capital requirements for banks should be much higher for what is perceived as risky, than for what is much more dangerous, namely what is perceived as safe. 

And contrary to how Ms. Tett might find something positive in the removal of bins, and which with one could agree, I cannot understand what positive one could possibly find in removing the incentives for banks giving loans to “risky” SMEs and entrepreneurs; those who in fact most need bank credit; those who we in fact most want to have bank credit, so that our economies do not stall and fall. 

Perhaps Ms. Tett would be interested in reading a recent working paper published by the ECB, “The limits of model-based regulation”. It shows that some of those who like Ms. Tett with close to willful blindness trusted Basel’s risk based regulations, are now reluctantly beginning to have some serious doubts. 

@PerKurowski ©

September 24, 2016

Not only criminals and tax-evaders, but also ordinary people can be against restrictions on cash.

Sir, referring to how the existence of cash creates difficulties for central banks imposing negative interests. you mention “economist Kenneth Rogoff, one of the… restrictions on the use of cash noted proponents, is still receiving death threats for raising the idea. “The growing challenge to central banks’ credibility” September 24.

Frankly, that phrases it as only assassins and bad people would be for blocking the idea of restricting cash. I am sure that non-violent, non-criminal, not-tax evading ordinary people can also find the restriction of cash very problematic.

Just as an example, if governments mistreat cash, with inflation, they mistreat all holders of it equally, but if there was no cash and all monetary assets and their movements were identifiable, they could be very selective in who they want to mistreat or not.

Does this mean in any way or form that I condone the bad uses of cash? Of course not, that would be worse than silly.


@PerKurowski ©

Central banks that only want banks to harvest what’s “safe” and not sow what’s “risky”, do not deserve any credibility

Sir, you write “central banks have resorted to ever more ingenious methods to convince a sceptical public that they still have the ability to create inflation”, “The growing challenge to central banks’ credibility” September 24.

Excepting those loving the current inflation in the values of assets, what sceptical public do you identify as wanting the core goal of central banks to be achieving higher inflation?

And as for their tools to obtain that “core goal” you mention the failures of QEs and low interest rates, and seemingly want them to dig deeper into negative interest rate territory.

No Sir! Any central banker that does not speak out against the risk weighted capital requirements for banks, that which have banks only refinancing the safer past and not financing the riskier future, do not deserve any credibility. Moreover they should be publicly shamed.


@PerKurowski ©

September 23, 2016

Truth is that all in the Fed behave less like doves, and much more like statist hawks

Sir, Sam Fleming writes: Federal Reserve once again held short-term interest rates unchanged… a victory for doves… Even if they concede a quarter-point increase by the end of the year, it will leave the Fed on track for the shallowest rate-lifting cycle in modern times”. “Doves ascendant in Yellen’s Federal Reserve” September 23.

The effects of keeping those interest rates down, when combined with the QEs, and when combined with the regulatory subsidies implicit in the 0% risk weighting of the sovereign, goes primarily and in large scale to the government. In that respect I am not sure we should talk about Fed doves, they all qualify more as statist hawks.

@PerKurowski ©

ECB and other statist still believe the way to a better future is lowering the debt costs of governments.

Sir, Claire Jones writes: “Altering the capital key rule would relieve banks [ECB] of the need to buy as many German Bunds as at present and allow them to purchase more bonds from heavily indebted states, such as Italy. “ECB fears legal action will limit scope to extend QE” September 23.

Even after monstrous amount of QEs have not led to sustainable growth worthy to write home about, central bankers, bank regulators, interested government bureaucrats and many of their statist colleagues, still believe that keeping the cost of debts of their government artificially low, is a way out to the current problems.

I don’t! I believe much more that the future potential for jobs, and for decent retirements, is in the hands of allowing SMEs and entrepreneurs an equal access to funds.

And that begins by throwing the risk-weighted capital requirements for banks out on the closest garbage landfill, where it belongs.

@PerKurowski ©

Portugal might need everything to be perceived as risky, so as to stop the regulatory distortions of bank credit

Sir, Peter Wise mentions a “crucial ruling by Canadian rating agency DBRS next month on Portugal’s only investment-grade credit rating.” “IMF fears Portugal recovery is running out of steam” September 23. 

Again, with bank regulations that directly discriminate against the access to bank credit of SMEs and entrepreneurs, only on account of them being perceived as risky, as if those perceptions were not already considered by the banks, there is no way any other type of stimulus is going to be sustainable, and the economy not run out of steam.

If Portugal cannot free itself from these regulations, perhaps the best think that could happen to it is for everything to be downgraded and seen as equally risky.

That would at least allow for some more efficient allocation of bank credit to the real economy. That could give Portugal a chance to work itself out of that hole in which, as I see it, the Basel Committee on Banking supervision, with its senseless risk weighted capital requirements for banks, has helped to dig. 

How sad IMF refuses to understand how current bank regulations distort.

@PerKurowski ©

September 22, 2016

As banks “pressure employees to hawk products”, regulators pressure banks to odiously discriminate against the risky

Sir, John Gapper writes about “the intense pressure Wells Fargo placed on employees to hawk products” “Wells Fargo reaches the end of its journey” September 22.

But, by means of the risk weighted capital requirements for banks, regulators have placed much pressure on banks to lend to what was perceived, decreed or concocted as safe; because that’s were they could leverage the most their equity; because that’s where they could earn the highest expected risk adjusted returns of equity; and so banks end up with excessive exposures to residential home financing, AAA rated securities, loans to sovereigns like Greece and other such fancy safe stuff.

That created also a de facto immoral regulatory discrimination against the access to bank credit of those who ex ante are perceived as “risky”, like SMEs and entrepreneurs. I place quotation marks around risky because in fact, by being perceived as that, they are never as dangerous to the bank system than what is perceived as “safe”.

Incentives are temptations, aren’t they? 

@PerKurowski

September 21, 2016

The German banks overextension to the shipping industry represents a great opportunity for investigative journalism.

Sir, James Shotter writes: “Before the financial crisis, lending to the shipping industry was big business for many German banks. [Now] however, those maritime exposures have assumed a nightmarish quality.” “Perfect storm looms over shipping lenders” September 21.

What a wonderful opportunity to do some real journalistic investigation. Why does not Shotter dig in and research what bank capital requirements the financing of the shipping industry generated for German banks? And then try to figure out whether German banks would have been so dangerously overexposed to it, had they been required to hold the same capital as when lending to German SMEs and entrepreneurs.

@PerKurowski

US, when will senators, like Elizabeth Warren, grill bank regulators with the same gusto they grill ban​k​sters?

Sir, I refer to Barney Jopson and Alistair Grays report on how John Stumpf was grilled in the Congress Wells Fargo clear misbehavior “Wells chief savaged in Congress over fake accounts” September 21.

Democratic senator Elizabeth Warren told Mr Stumpf: “Your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds.”

Is senator Warren wrong? Absolutely not, but the grilling, if it does not also include a serious grilling of the bank regulators, is just another pushing the blame on banks, in order to score cheap populist victories attacking “banksters”.

Here follows just few of the questions the US Senate's Banking Commission should pose regulators.

With your risk weighted capital requirements you allow banks to leverage more their equity, and the support we the society give them, with what is perceived as safe than with what is perceived as risky.

Do you not understand that favoring in this way The Sovereign, The Safe, The Past, The Rich, The Houses and The AAArisktocracy, impedes the fair access to bank credit of We the People, The Risky, The Future, The Poor, The Jobs and The Unrated? Who gave you the right to distort the allocation of bank credit to the real economy this way? Don't you understand with that you have de facto decreed inequality?

In all your regulations where have you defined the purpose of our banks? Does not John A Shedd saying: “A ship in harbor is safe, but that is not what ships are for” also apply to banks? Or is it really that you felt you did not need to do that in order to regulate banks?

Finally, for this first round of questions: Where did you get that funny idea behind all this that what is ex ante perceived as risky, is riskier to the banking system than what is perceived as safe, and that is therefore much likely to cause dangerous excessive bank exposures? Have you never heard of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”?

Don’t you see how these regulations helped to cause the crisis? Don’t you see how making it harder than usual for SMEs and entrepreneurs to access bank credit dooms us to stagnation?

By the way, before you go, where do you think we would we be if the credit rating agencies had, so luckily, not fouled up so fast?

@PerKurowski ©

September 19, 2016

Senator Elizabeth Warren, what about the staggering bad bank regulations that came out of the Basel Committee?

Sir, Patrick Jenkins writes: “Today, Mr Stumpf will face an inquisition at the Senate banking committee. It promises to be a hostile experience — no-nonsense committee member Elizabeth Warren is not known for her love of the banking sector and has already talked of Wells’ “staggering fraud”. “Wells Fargo chief ’s high noon is Senate committee grilling” September 20.

I’ve got no problem with any “grilling” of bankers, give it to them! But, Senator Warren, in all fairness, do not turn it all into another simpleton Bank-Bashing fair, We the People need it to be much more. If anything, look at how the bank regulators set up all the incentives for bankers to do wrong.

Why on earth should we expect bankers to be saints and resist the temptations? Aren’t they supposed to maximize their risk adjusted returns on equity?

What am I talking about? THIS

PS. And Senator Warren, why would you agree with those who decreed inequality?

@PerKurowski ©

Mario Draghi is one of those who decided to put a stop on the egalitarian forces of bank credit, decreeing inequality.

Sir, Motoko Aizawa and Daniel Bradlow write: “Quantitative easing, by raising asset prices, has disproportionately benefited the wealthy, thereby contributing to rising inequality.” And they are of course right questioning why Mario Draghi “does not acknowledge the ECB’s own responsibility for the growing concern about redistribution and inequality in Europe and around the world.” “Draghi must accept ECB contributes to inequality” September 19.

But, when they write “Moreover these policies seem indifferent to the need for a more inclusive financial system that, for example, increases the availability of credit to small businesses and encourages banks to provide financial services more responsive to the needs of the poor and young people.”, they do not focus on what’s really causing this, namely the risk weighted capital requirements for banks.

That specific piece of regulations favors the access to bank credit of the safe, the past, the developed, the old, and the rich; and thereby blocks the opportunities of the risky, the future, the developing, the young and the poor.

John Kenneth Galbraith in his book “Money: “whence it came, where it went” (1975) wrote “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is…”

The Basel Committee of which Mario Draghi is the current chair of the Group of Governors and Heads of Supervision; and the Financial Stability Board of which he was the former Chair, decided to put a stop on such egalitarianism… and basically decreed inequality.

@PerKurowski ©

Global and local inequality is much driven by dumb bank regulations. World Bank and IMF should do something about i

Sir, Branco Milanovic, with respect to “global inequality” writes: “While for national statistics and inequality measures, there is at least a national government that citizens can blame for high inequality, there is no comparable body globally.” “Putting a number on global inequality is long overdue" September 19

Oh no! For quite a lot of that inequality, I totally blame the Basel Committee on Banking Supervision. With its risk-weighted capital requirements for banks, which favor the access to bank credit of the “Safe”, the developed, the rich, the past, it is basically decreeing inequality.

The interesting aspect with that global inequality driver is that it also causes inequality on a local national level. Just try to figure out how many millions of SMEs and entrepreneurs, all around the world, have been denied access to bank credit because of this regulation.

And yes both the World Bank and the International Monetary Fund have a role to play correcting this.

The World Bank, as the world’s premier development bank, knowing that risk taking is the oxygen of any development, should send bank regulators clear signals to the effect that nothing is as dangerous as excessive risk aversion.

And the IMF, in charge of worldwide financial stability, should also tell regulators to stop being silly, since no major bank crisis has ever resulted from excessive exposures to something ex ante perceived risky. 


@PerKurowski ©

Lucy Kellaway, how should guilty bank regulators apologize and be held accountable?

Sir, I refer to Lucy Kellaway’s “Wells Fargo’s wagonload of insincere regrets” September 17, only in order to ask her a question.

Here is a link to my unasked for testimony on the causes of the bank crisis 2008


If I am correct, how would Lucy Kellaway suggest the guilty bank regulators should apologize… and how should they be held accountable?

@PerKurowski ©

September 17, 2016

This would be my brief testimony about what caused the 2008 bank crisis… if ever allowed

Sir, John Authers writes: “This week, Senator Elizabeth Warren, said the next president should reopen investigations into senior bankers who avoided prosecution, and that the FBI should release its notes on its investigations. The failure to punish any senior bankers over the scandal angers the populist left and right, the world over.”, “We are still groping for truth about the financialcrisis” September 17.

The following, if I am ever allowed to give it, as so many would not like to hear it, would be my brief testimony on what caused the 2008 bank crisis

Sir, as I have learned to understand it, the 2008 crisis resulted from a combination of 3 factors.

The first were some very minimal capital requirements for some assets that had been approved starting in 1988 for sovereigns and the financing of residential housing; and made extensive in Basel II of 2004 to private sectors assets with good credit ratings.

These allowed banks then to earn much higher expected risk adjusted returns on equity on some assets than on other, which introduced a serious distortion. After Basel II the allowed bank equity leverages were almost limitless when lending to “sound” (or friendly) sovereigns; 36 times to 1 when financing residential housing; and over 60 to 1 with private sector assets rated AAA to AA. Just the signature, on some type of guarantee by an AAA rated, like AIG, also allowed an operation to become leveraged over 60 times to 1.

The second was Basel II’ extensive conditioning of the capital requirements for banks to the decisions of some very few (3) human fallible credit rating agencies. As I so many times warned about (in a letter published in FT January 2003 and even clearer in a written statement delivered at the World Bank), this introduced a very serious systemic risk.

The third factor is a malignant element present in the otherwise beneficial process of securitization. The profits of that process are a function of how much implied and perceived risk-reduction takes place. To securitize something safe to something safer does not yield great returns for the securitization process. Neither does to securitize something risky into something less risky.

What produces BIG profits is to securitize something really risky, and sell it off as something really safe. Like awarding really lousy subprime mortgages and packaging them in securities that could achieve an AAA rating. A 11%, 30 years, $300.000 mortgage, packaged into a security rated AAA and sold at a 6 percent yield, can be sold for $510.000, and provide those involved in the process an instantaneous profit of $210.000 

With those facts it should be easy to understand the explosiveness of mixing the temptations of limitless , 36, and more than 60 to 1 allowed bank equity leverages; with subjecting it too much to the criteria of few; with the profit margins when securitizing something risky into something “safe”. Here follows some indicative consequences:

As far as I have been able to gather, over a period of about 2 years, over a trillion dollars of the much larger production of subprime mortgages dressed up in AAA-AA ratings, ended up only in Europe. Add to that all the American investment banks’ holdings of this shady product.

To that we should also add Europe’s own problems with mortgages, like those in Spain derived in much by an excessive use of “teaser interest rates”, low the first years and then shooting up with vengeance.

And sovereigns like Greece, would never have been able to take on so much debt if banks (especially those in the Eurozone) would not have been able to leverage their equity so much with these loans.

Without those consequences there would have been no 2008 crisis, and that is an absolute fact.

The problem though with this explanation is that many, especially bank regulators, especially bank bashers, especially low equity loving bankers, do not like this explanation, so it is not even discussed.

The real question though is: Who is the guiltiest party, those who fell for the temptations, or those who allowed the creation of the temptations?

I mean how far can you go blaming the children from eating some of that deliciously looking chocolate cake you left on the table, at their reach?

Sir, John Authers, tell me if you believe I at least have a point, should that not merit a discussion?

@PerKurowski ©

September 16, 2016

Free market capitalism with regulatory controls on the free flow of bank credit, is an oxymoron

Sir, I am not discussing here Margrethe Vestager’s, the European Commission’s competition chief decision to order Apple to pay €13bn in back taxes to the Irish government. But, titling as Philip Stephens does his September 16 article, “How to save capitalism from capitalists” seems to me topsy-turvy.

What now most hinders free-market capitalism from delivering its full potential, is not capitalists, but inept and statist bank regulators.

Currently, for the purposes of the risk weighted capital requirements for banks, “The Risky”, like SMEs and entrepreneur, those who cannot even afford a credit rating, are given a risk weight of 100%, while the government bureaucrats who are going to spend the tax revenues, or the public indebtedness, are risk weighted at 0%.

That translates into that government borrowings are subsidized, a fiscal revenue, with the subsidies, the taxes, paid by those “risky” that as a result have less access to bank credit.

So the real question should be: how to save free-market capitalism from state capitalists.

As is we really need a Robin Hood to come and rescue us from Sheriffs of Nottingham disguised as expert bank regulators.

But it is even worse, because those yet unpaid €13bn of Apple are not allowed to flow freely as bank credit even within the private sector; and that is because “The Safe”, the AAArisktocracy, have also been given a much lower risk weight, one of only 20%.

Sir, and if only those who rightly pressure taxpayers to correctly pay up, would also try to pressure with the same vehemence, the tax revenue spenders to correctly spend.

@PerKurowski ©

Nowadays they are much more sophisticated

What’s perceived safe could be much more dangerous than what’s perceived risky. Why is that so hard to understand?

Sir, Gillian Tett, responding to “Why on earth would anyone buy a bond that yields a negative interest rate?” includes in the answer: “desperation” (they cannot think of anywhere else to park their funds) or “regulation” (they have to buy bonds to comply with financial supervision rules or investment mandates)” “The alchemists who turn negative yields into profit” September 16.

And then Ms. Tett explains interestingly how “some investors have found ways to make those negative yields pay” with “the rather esoteric corner of finance of dollar-yen cross currency swaps”.

But, if “government intervention to reinvigorate stagnant economies has left markets so peculiarly distorted” is the search for profit opportunities derived from distortions more important than eliminating the distortions?

I ask, because in all these years Ms. Tett has been unwilling to touch, even with a ten-foot pole, one of the most fundamental sources of distortion, namely the risk weighted capital requirements for banks.

That piece of regulation, by focusing on the ex-ante perceived risk of bank assets, and not on the ex-post risk for the banking system conditioned to how banks manage those ex-ante perceived risks, is loony and dangerous. As an example it allowed regulators to come up with a risk weight of only 20% for AAA to AA rated assets, while placing one of 150% on the so much less dangerous assets like the below BB- rated.

Sir, am I wrong to think an anthropologist should be able understand this?

@PerKurowski ©

Governments best take big decisions, when there’s no conflict of interest, no stupid groupthink, and contestability.

Sir, I come from an country, Venezuela, where privatizations of public owned utilities were based not on who would provide us citizens the best services, but on who would provide the state with the highest upfront payment… an anticipated tax revenue for the government, to be paid later by us citizens by means of higher than needed tariffs, for decades to come. And, to top it up, that was accused of being odious neo-liberalism product of the Washington Consensus. 

That’s why when I read Martin Wolf’s “Big energy decisions are best taken by government, not the market” of September 16… I immediately reacted… “Hold it there, take it very easy!”

If government is going to take big decisions, as it should, we must make sure all its possible conflicts of interest are removed, and that the decision process is transparent and guarantees contestability, and not just the result of a small mutual admiration club of technocrats/bureaucrats.

For instance, allowing bank regulators to impose their statism of a 0% risk weight for the Sovereign and a 100% risk weight for “We the People”, was wrong.

And allowing bank regulators to impose risk weighted capital requirements for banks based on the ex ante perceived risks of bank assets, and not on the ex post risks conditioned on the ex ante perceived risks, was utterly stupid. What’s the chance of something really bad happening from something perceived as “safe”, and what is it for something “risky”?

Wolf lectures us: “Rational risk-taking by individual financial businesses will create substantial threats for others. This, too, is a spillover, or “externality”. Financial regulation has to internalise such externalities, thereby reducing the likelihood of crises and making them more manageable when they arrive. One way to do so is to raise capital requirements far above what profit-seekers would wish”

I argue that much more important than that, is to get rid of the credit-risk weighting of the capital requirements that only distorts the allocation of bank credit to the real economy while serving no bank safeness purpose, much the contrary. Wolf, in spite of hundreds of letters I have sent him over a decade on this issue, has yet to understand that.

And Wolf ends “The government must have the courage to make… difficult decisions and the wisdom to make them well.” Yeah, yeah, yeah, but what if the decision makers are dumb and we are not allowed to correct them… because so many want to suck up to them nevertheless (like in Davos)… or because some are interested in exploiting that dumbness? 

@PerKurowski ©

September 15, 2016

For governments to take advantage of current low rates in order to build infrastructure, is not a sure great thing.

Sir, Trevor Greetham argues that the government, taking advantage of current conditions, should take on debt and invest in infrastructure, all in order to stimulate nominal growth through government spending while suppressing interest rates; meaning that it should on purpose pursue a policy of transferring wealth from savers to borrowers.” “Hammond should not let the low gilt yields go to waste”. September 15.

Sir, I am not sure that is a constructive way of thinking. Greetham mentions that a big reason for the low interest rates on government bonds is “pension fund buying”. I assume he would not dare to complain if, when he retires, he does not get the pension he expected.

But worse, another reason for the low interest rates is the risk weighted capital requirements for banks; which diverts credit from 100% risk weighted SMEs and entrepreneurs, to the 0% risk weighted government. That sounds like a very doubtful way of how to build future.

And that’s even ignoring the possibilities of much infrastructure investments ending up in bridges to nowhere.

@PerKurowski ©

I don’t understand how the British people can accept so quietly the Basel Committee’s risk weights.

Sir, Elaine Moore writes: “British debt — one of the oldest securities in the world whose roots can be traced back to King William III’s desire to fund a war in France — should be relatively straightforward. Domestic and international investors regard the UK as a safe bet” “FT Big Read: UK Gilt complexities” September 15.

Moore ignores here the effect of current bank regulations but I must say, to me, as an outsider, it is truly hard to understand how, in these days, the British people allow the Basel Committee to assign them a risk weight of 100% while giving the AAArisktocracy one of only 20% and the Sovereign a 0%.

Where would Britain have been today had these risk weights, that clearly discriminate against the access to bank credit of SMEs and entrepreneurs, been in place since King William III’s days?

Don’t you think that your governments have it easy enough to sell gilt without having to give it this regulatory subsidy?

I wonder if anyone at BoE has given the slightest thought to where interest rates on new gilt sold would be, without a little help from the Basel Committee?

Sir, doesn’t anyone in FT know that the “little help” is paid by the lesser or more expensive access to bank credit of some other? 

@PerKurowski ©

September 13, 2016

Mario Draghi, you should be ashamed, as a bank regulator, you helped to leave behind, those left behind

Sir, Claire Jones and Alex Barker write that Mario Draghi, the president of the European Central Bank, Donald Tusk, the president of the European Council, and Christine Lagarde, the head of the International Monetary Fund…issued separate pleas yesterday to address the plight of those “left behind” by globalization”, “Draghi makes appeal for those ‘left behind’” September 14.

The fact is though that Mario Draghi, the former chair of the Financial Stability Board, and the current Chair of Governors and Heads of Supervision of the Basel Committee on Banking Supervision, is fully supporting the pillar of current bank regulations, namely the risk weighted capital requirements for banks.

That regulation has given a risk weight of 0% to the Sovereign, 20% to the AAArisktocracy, and 100% to We the People, like the SMEs and entrepreneurs.

John Kenneth Galbraith in his “Money: Whence it came where it went”, 1975, wrote: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is”.

And so, with their discrimination against “The Risky”, regulators, like Mario Draghi, decreed inequality. And so they have no right to try to bullshit us now with some deep-felt concerns with those left behind.

And to top it up, with his QEs, Draghi has mostly helped those who already had assets.

@PerKurowski ©

Martin Wolf, motorcycles are much riskier, and that’s precisely why more people die in car accidents

Sir, Martin Wolf writes: “The determinants of the secular decline in the real natural (or neutral) rate of interest are forces affecting the supply and demand for funds. These include ageing, slowing productivity growth, falling prices of investment goods, reductions in public investment, rising inequality, the “global savings glut” and shifting preferences for less risky assets” “Monetary policy in a low rate world”, September 14.

Not a word about the risk weighted capital requirements for banks. These have created regulatory incentives for banks to avoid, much more than usual, any riskier assets, like loans to SMEs and entrepreneurs, and to concentrate, much more that usual, on assets that are perceived, decreed or concocted as safe, like loans to the Sovereign and to the AAArisktocracy. And that has to slow the growth of productivity and cause the real economy to stall and fall.

That motorcycling is perceived as much more riskier, and that precisely because of that, more people die in car accidents, is a reality that neither our current bank regulators nor Martin Wolf can seem to understand, confused as they are by what is ex ante and what is ex post risks.

Like Lawrence Summers Wolf opines “Today’s remarkably low real interest rates mean that a big push on public investment has never been more opportune.”

Yeah, yeah trust more in government bureaucrats than in the “risky” private sector, and leave the bill to future generations.

@PerKurowski ©

September 12, 2016

When does groupthink really become more of a dangerous group-no-think?

Sir, Andrew Hill, discussing the works of Jennifer Chatman from UC Berkeley’s Haas School of Business writes: “Cohesion and co-operation may look like virtues, but they could be symptoms of groupthink. The greater the collective will of the team — and the higher the stakes — the less likely people are to dissent, because, in Prof Chatman’s words, ‘speaking up about risks is like saying you have no confidence in the group’.” “When the stakes are high, dissent is a sign of success”, September 12

So if “dissent and friction are unlikely signals of success” Prof Chatman says: “Maybe we need to live with a little more discomfort and difference to get these valuable outcomes.”

And again I must ask myself; might that be the reason for that no one in the bank regulation community spoke up against that strange theorem that held that what was perceived as risky was riskier to the banking system than what was ex ante perceived as safe? That theorem is in fact so loony that we perhaps should not even speak about groupthink, but more in terms of group-no-think.

And truly dangerous that was, since from that theorem they deducted their risk-weighted capital requirements; which then completely distorted the allocation of bank credit to the real economy.

So what “little more discomfort” should we apply for instance to the Basel Committee? Could a town-hall meeting where doubters could ask their questions suffice? I am not sure, I have spent more than a decade asking the regulators this, and they just don’t answer; worse nobody finds anything strange with their silence.

Or is it that what I confront is not a group but a massive gathering of confused minds; that among other includes you Sir and perhaps all FT journalists; I mean something like that which was the case when the earth was believed flat?

@PerKurowski ©

And we must also stop regulators, like those in the Basel Committee, from being so damn creative

Sir, I refer to Lucy Kellaway’s “The plague of compulsory creativity may be dying out” September 12.

She is absolutely right in what she there argues, but she could have added power to her arguments by identifying when empowering creativity, can lead to some truly dangerous creativity, and cause huge disasters.

Think for instance of the bank regulators in the Basel Committee. Based on the very creative theorem that what is ex ante perceived as risky, is riskier for the bank systems than what is perceived as safe, they created the risk weighted capital requirements for banks; and with that they seriously distorted the allocation of credit to the real economy,

And now the safe havens are becoming dangerously overpopulated, while all the risky bays, where SMEs and entrepreneurs reside, are equally dangerous being underexplored.

@PerKurowski ©

September 11, 2016

Lawrence Summers wants to get the quality infrastructure jobs now, and leave the bill to future generations

Sir, Lawrence Summers writes “Infrastructure investment can create quality jobs [and] expand the economy’s capacity in the medium term and mitigate the huge maintenance burden we would otherwise pass on to the next generation” “Building the case for greater infrastructure investment” September 12. 

And since that is based on taking on more public debt that shamefully sounds like: “Dear lets go out tonight to enjoy that great restaurant. We can leave the bill to our grandchildren, as the interest rates they have to pay are so low.”

Summers backs up his proposal with some calculations that start with “The McKinsey Global Institute has estimated a 20 per cent rate of return on such investments.”

Well Professor Summers, and McKinsey, and so many other, because they do not know, or because they are pushing a statist agenda, completely ignore the fact that currently the sovereign, meaning the government represented by government bureaucrats, for the purpose of setting the capital requirements for banks, is risk weighted at 0%; while We the People, represented by SMEs and entrepreneurs have to carry a risk weight of 100%.

That subsidizes the borrowing costs of the government, by the taxing the possibilities of accessing bank credit of those who we need most to have access to bank credit.

Of course much infrastructure investment needs to be done, but, in order for there being an economy that could use such infrastructure, much more important is it to take down that odious regulatory wall.

Sir, again, banks are no longer financing our grandchildren’s future, they are only refinancing mine, yours, Professor Summers’s and all McKinsey’s safer past.

What a disgraceful way of giving the finger to that intergenerational social contract Edmund Burke wrote about.

@PerKurowski ©

September 10, 2016

If an algorithm can be the boss, why don’t we use our own algorithms to be our own bosses?

Sir, I refer to Sarah O’Connor’s enlightening and interesting “When the boss is an algorithm” September 10.

I would not mind at all getting rid of my car, if I was sure there was a service out there that could respond reasonably well to my needs.

But my needs are in essence somewhat different than Uber drivers’ needs. I want a taxi when I need it, and they offer a taxi when their drivers feel like it.

So, in my neighborhood, and I care little about neighborhoods hundred of miles away, why could we not have a transportation cooperative, run by algorithms decided upon between users and drivers?

In fact, even if I got rid of my own car, I can easily imagine myself providing driving services using my neighbor’s car, with his remunerated permission of course, or using some collective neighborhood cars.

@PerKurowski ©

Tim Harford explains why a kakocracy, like that of the Basel Committee on Banking Supervision, is likely to endure

Sir, Tim Harford writes about “Kakonomics – the economics of rottenness. There are corners of the economy where poor work is the norm, not the exception.”, “The hazards of a world where mediocrity rules” September 10.

Harford argues “a true kakonomy is collusive, a tacit agreement to be mediocre at someone else’s expense …Once a kakocracy has been established, it is likely to endure: recruiters will be careful not to hire anyone who might not only rock the boat but also repair the leaks and fix the outboard motor.” 

If as a regulator, at the huge cost of distorting the allocation of credit to the real economy, you introduced risk weighted capital requirements for banks to make these safe, one could assume you would be able to answer the following question: When and where did the last bank crisis resulting from excessive exposures to something believed ex ante as risky occur?

So, if the Basel Committee the Financial Stability Board and all those other involved with bank regulations like the Fed, BoE, ECB, IMF, FDIC and similar can’t answer that question, would it be wrong of me Sir to suspect they all constitute a regulatory kakocracy?

Sir, if you yourself have steadfastly refused to listen and voice my arguments on this issue, perhaps so as not wanted to be seen as rocking the boat, would it also be wrong of me to believe you could belong to that same kakocracy?

Is a bank regulation kakocracy dangerous? You bet!

PS. Of course I do not base my suspicions on just one unanswered question.

PS. How resilient is the bank regulation kakocracy? If it is as willing to go to any extreme measures to defend its kakonomics, as the current Venezuela Chavez/Maduro government does, then we’re in serious trouble.

@PerKurowski ©

September 09, 2016

How can expectations be high when you discriminate against the future, on account of it being riskier than the past?

Sir, John Kay writes: “It is not because interest rates are too high that eurozone consumption is sluggish but rather because expectations are so low. Fiscal austerity and the aftermath of the global crisis have dimmed the employment prospects of a generation of young Europeans. Low interest rates have as intended pushed up the prices of long-dated bonds and houses” “The twisted logic of paying for the privilege of lending”, September 10.

Frankly, how can expectations not be low, when we have regulators that order banks to hold more capital against what’s perceived as risky, the future, a job to be created; than against what is perceived as safe, the past, a house that has already been built?

And Kay writes: “There are obvious requirements for investment in the eurozone — to provide power through cleaner energy plants, to improve roads and relieve overcrowding on trains, to build houses, to accommodate tens of thousands of recent refugees and above all to fund the new businesses that will promote innovation on the continent.”

Yes, but, if so, why do we not have capital requirements for banks based on those purposes?

Mr. Kay, I tell you, it is not “dysfunctional capital markets, rather than any excessively high interest rates, that are behind an investment shortfall across Europe”. It is totally dysfunctional bank regulations.

Mr. Kay also reminds us of the “aphorism that people will lend you money so long as you can prove you do not need it”. But Sir, that is what Mark Twain told us long ago: “The banker lend us the umbrella when the sun shines and wants it back when it looks like it could rain”; and which is precisely why the Basel Committees’ risk weighted capital requirements for banks don’t make sense.

Mr. John Kay, wake up!... and you too Sir.

@PerKurowski ©

Where have all safe assets gone? Short time passing. Gone to banks and central banks. When will regulators ever learn?

Sir, Elaine Moore, with respect to ECB’s QEs writes: “From the moment the European Central Bank first announced plans to revive the eurozone economy with a mass bond-buying programme, financial markets have expected trouble. First the focus was illiquidity and mispricing — now it is scarcity”, “Mechanics exposed as debt pool starts to run dry” September 9.

How could scarcity not be? Basel II’s low risk weighted capital requirements plus Basel III’s liquidity requirements, have substantially increased the demand of banks for low 0% risk weighted sovereign debt. That together with Central Banks purchases of “safe sovereign debt”, for their own QEs, just had to create scarcity.

Now we can hear widows, orphans and pension funds ask: Where have all safe assets gone? And the answer is to banks and Central banks everyone. Indeed when will they ever learn.

The saddest part though is that, as a result of all this odious regulatory distortion, the 100% risk weighted SMEs and entrepreneurs, those who most need and could do good with bank credit, they are left out hanging dry.

Sir, if we do not finance the riskier future and only keep to refinancing the “safer” past, we’re toast… even if there is no global warming.

@PerKurowski ©

FT, get off my cloud! Stop betting our future on technocrats and bureaucrats, instead of on SMEs and entrepreneurs

Sir you write: “Mr Draghi is justified in claiming that the ECB’s stimulus is working…[though] growth remains well below the level needed to drive sustained improvements in living standards.” So you basically egg Draghi on, just as you egg on governments to spend more of what they don’t have. “Draghi’s fight to uphold the ECB’s credibility

Come on, the ECB has now after 18 months of aggressive bond buying, injected 1 trillion euros in cash into the economy… about 10% of the Eurozone’s GDP, and yet very little real sturdy sustainable economic growth has resulted. Don’t the technocrats ask themselves why?

Seemingly not; perhaps because that would require them to face that nightmarish possibility that the risk weighted capital requirements for banks, that regulation to which so many of them are closely associated to, is exactly as stupid as I have been telling them for way over a decade.

Mario Draghi is the chair of the Group of Governors and Heads of Supervision of the Basel Committee, and was the Chair of the Financial Stability Board. It is clear he would see his professional reputation severely tarnished by having to recognize publicly such simple facts of life that what is perceived as risky is, most often, much less dangerous than what is perceived as safe... and that therefore the Basel Committee’s bank regulation pillar, makes absolutely no sense.

The current credit risk weighting of the capital requirements for banks, hinders monetary and fiscal stimulus from reaching the risky SMEs and entrepreneurs, those who most could want and need the resources, those who most could do some real growth with those resources.

Sir, no matter how much runaway statists insist, it is just not true that the zero percent risk weighted sovereign bureaucrats know better how to deploy bank credit efficiently, than our 100% risk weighted private sector SMEs and entrepreneurs. Get off my cloud!

@PerKurowski ©

September 08, 2016

With respect to the Big Four, it is all déjà vu

Sir, I refer to Brooke Master’s “A clubby oligopoly that is overdue for reform” of August 20 and to your editorial “Accountancy’s Big Four need more competition” August 25.

“The Big Four accounting firms became big by marketing the value of their size. Now they want to have their cake and eat it too, asking to be sheltered from ruinous lawsuits. If accountability is to mean anything in accounting, we cannot afford to turn the concept of professional responsibility into a risk model of affordability.

Individual professionals and small firms lay their names on the line, day after day. If the Big Four cannot handle it, they had better let go. Then we might all be better off. At least the systemic risks will be smaller.”

Sir and that is a letter I wrote and that you published in May 2004, 12 years ago, before I became a pariah to FT.

And years earlier, in 1997, in an Op-Ed in Venezuela I had analyzed much of that issue though from a slightly more local angle. It is amazing to see how serious problems are identified, and then nothing is done to solve these, and they come back to haunt us over and over again.

PS. Brooke Master writes in her piece that a disgruntled PwC trainee described PwC as a “meat grinder” and moaned about how boring the job” Does that not sound like accounting could become ready for the use of robots?

@PerKurowski ©

Gillian Tett writes of Apple’s $200bn of cash, as if that money was all stashed away in Tim Cook’s mattress

Sir, Gillian Tett writes that Apple could “repatriate some of the $200bn of cash that it stores overseas”, “It is hard to lure companies’ cash back home” September 9.

And Tett indicates three ideas about what could be done with all that money.

“One, for example, is that tax breaks will only be given to companies that raise employment and investment. Another is that the Federal government should use tax revenues for infrastructure spending. A third, is that companies should store some of their repatriated corporate cash in government-issued infrastructure bonds.”

But that cash is not stashed away in Tim Cook’s mattress, it is invested somewhere somehow, and for the government to lay its hands on a part of it, some assets would need to be sold.

For instance what if all that cash is already invested in US Treasury yielding basically nothing? What if it is invested in shares?

And why should “tax breaks will only be given to companies that raise employment and investment”? It might not be the role of those companies to channel funds to those who could produce jobs. Apple, is not a bank!

Frankly, the strategic plan of our current economic thinkers is as lousy as can be.

It states: With high risk weights, limit the fair access to bank credit of SMEs and entrepreneurs, those who could create the jobs for the future; and with low risk weights increase the possibilities of government bureaucrats building bridges to nowhere.

Is that what you want Sir. If you do, I would then have to ask you: Do you have children and grandchildren? “No?” Ok, that explains it all.

@PerKurowski ©

Moody, what would happen to US credit ratings if suddenly it was not any longer the world’s mightiest military power?

Sir, Rochelle Toplensky and Eric Platt write that according to Moody, the four primary factors it considers when assessing a country’s creditworthiness are “very high degree of economic, institutional and government financial strength and its very low susceptibility to event risk”, “Moody’s warns next US president over debt” September 8.

In the case of the US they perhaps miss a very important factor. As I once argued in a letter that the Washington Post published, “Much more important than a triple-A for the United States is the fact that this country is, by far, the foremost military power in the world. Lose that supremacy and all hell breaks loose. Keep it and a BBB rating could do.”

And so perhaps you should ask Moody: How would it impact your credit rating of the US if the US was no longer, by far, the mightiest military power? And would the credit rating of any closing up mighty then automatically improve?

@PerKurowski ©

September 07, 2016

Basel’s risk weighted capital requirements for banks, a de facto capital control, blocked bank credit globalization

Sir, Martin Wolf writes: “The financial crisis brought with it regulatory measures, many of which are bound to slow cross-border financial flows”, “The tide of globalization is turning” September 7.

Again Wolf ignores what was there before the financial crisis, namely the risk weighted capital requirements for banks. That piece of regulation favored awarding bank credit to the “safe”, the rich, houses, the developed, the government or anything else that could be perceived, decreed and concocted as safe; and thereby de facto disfavored awarding bank credit to the “risky”, the poor, job creation, the undeveloped and the non AAArisktocratic private sector.

That is an effective capital control that was bound to slow cross-border financial flows.

Before I became a sort of pariah to FT, in a published letter of November 2004, I wrote, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world.”

And in 2007, at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled “Are the Basel regulations good for development?” and which touches a lot on how the risky are discriminated.

So no Mr. Wolf, 28 years after Basel I and 12 years after Basel II, don’t try to put the blame on the crisis and Basel III.

“Globalization’s future depends on better management. Will that happen?” Alas, with media empowered opinion forming dominators like Martin Wolf, I am not optimistic.

@PerKurowski ©

It is Robert Jenkins and his bank-regulation buddies who, as an absolute minimum, should be placed on the naughty step

Sir, Robert Jenkins writes “Prioritizing competitiveness is precisely what led to lax regulation”, “A little longer on the naughty step will benefit banks” September 7.

While prioritizing competitiveness between banks, trying to make these follow similar rules all over the world, regulators introduced the risk weighted capital requirements for banks.

That piece of regulation impeded those borrowers perceived as risky, like SMEs and entrepreneurs to compete fairly for access to bank credit, and therefore decreed inequality and economic stagnation.

That piece of regulation, by motivating banks to build up dangerous excessive exposures to what was perceived, decreed or concocted as safe, like AAA rated securities, financing of houses and loans to sovereigns (like Greece), caused the 2007/08 crisis.

Robert Jenkins, as former member of the Bank of England’s Financial Policy Committee should, together with all his bank regulation buddies, as an absolute minimum, should be placed on the naughty step.

Personally I would prefer them having to parade down some major avenues wearing dunce caps and forever be barred from having anything to do with any type of regulations… I mean how dumb can you be to believe that what is perceived as risky is riskier for the banks than what is perceived as safe.

Info: Basel’ private sector risk weights: for AAA rated = 20% and for below BB- 150%

@PerKurowski ©

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

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

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

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

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

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

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

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

@PerKurowski ©

September 06, 2016

FT’s future history exam draft, leaves out questions that could question some who are not to be questioned now

Sir, Gideon Rachman tries to imagine the questions future historians will ask about today’s political events drafts a history exam for students graduating in 2066, “An exam paper from the future” September 6 

I can certainly imagine a couple of other interesting questions, the problem though is that including these, would question some who are currently active and would not like to be questioned, like perhaps the exam-drafter himself

For instance:

How come regulators, with risk weighted capital requirements, decided without any empirical analysis, that what is perceived as risky is riskier for the banking system than what is perceived as safe?

How come regulators, by allowing banks to leverage equity differently with different assets, did not understand they would be distorting the allocation of bank credit to the real economy?

How come leading financial newspapers, and its journalists, mostly ignored the thousand of letters sent to them by a reader and that were related to those two previous questions?

@PerKurowski ©

September 05, 2016

Banks had and have little capital, not because of SMEs, but because of what perceived, decreed or concocted as safe.

Attracta Mooney writes “Rules introduced to shore up bank balance sheets left lenders reluctant to lend large sums to SMEs” “Fund houses take on banks over lending” September 8.

That is so wrong but, knowing you FT, you will do nothing to correct that impression.

Banks need to shore up their balance sheets, not because of SMEs, but because of too much lending against too little capital requirements, to what was perceived, decreed or concocted as safe.

Since the introduction of risk weighted capital requirements for banks with Basel I in 1988, and especially since Basel II of 2004 assigned different risk weights within the private sector, for instance 20% for what has an AAA to AA rated and 100% to what has no credit rating, banks were given huge incentives to lend to The Safe and became thereby reluctant to lend to The Risky, like the SMEs.

I pray one day banks get back to their business of earning their returns on equity by lending with reasoned audacity, instead of by minimizing their equity

Meanwhile, clearly shadow banks will have their day!

@PerKurowski ©

PS. Oops… sorry Attracta Mooney: “Rules introduced to shore up bank balance sheets left lenders reluctant to lend large sums to SMEs”, is correct.

My mistake was that I read it as some “specific new discrimination” had been introduced against the “risky” SMEs, something which Basel III did not, but Basel III (especially the leverage ratio which raised the minimum floor) and the crisis, have indeed intensified the discrimination that came from before. And here was my take on that Drowning Pool problem.

PS. Oops… sorry again Attracta Mooney: Again I must accept I was wrong. When writing my first commentary I had completely forgotten the liquidity requirements for banks enacted by Basel III. Of course these also affected the SMEs' fair access to bank credit.

September 03, 2016

For sturdy returns on equity, banks must abandon their dangerous road of maximizing returns by minimizing equity.

Harriet Agnew and Patrick Jenkins write: “This manner of doing business in which a handful of influential individuals could orchestrate the markets [1986]… In today’s terms would be completely illegal” “Big Bang II What’s next for the city?

What? A handful of individuals orchestrated the markets more than ever when, for instance with Basel I in 1988, for the purpose of setting the capital requirements for banks, they decreed the risk weights of the Sovereign to be 0% and that of 100% We the People 100%.

And the authors quote Pierre-Henri Flamand with: “Brexit may mean a reverse Big Bang for the UK’s relationship with Europe… But it could mean Big Bang II for its relationship with the rest of the world. Brexit could improve the City’s prospects of doing business in parts of the world such as Asia and Africa where the growth is”

And on that I agree, but only if the banks go back to being banks making returns on equity by means of reasonably audacious banking, abandoning that dead-end road of maximizing returns by minimizing equity.

If they don’t then I guess we will have to endure other types of Big Bangs, like the on I was referring to when in 1999 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 the death of the last financial dinosaur that survives at that moment.”

Since they introduced that systemic risk, risk weighted capital requirements for banks, and even after the 2007-08 crisis insist on keeping it, I still fear that a truly Bad Big Bang is closer than any Big Bang II.

In short, if the City wants to maintain or even gained competitiveness, then it must recreate itself in a non-distorted way. Escaping the the influence of the Basel Committee is much more important for Britain and its banks (and for all other nations) than any Brexit or no Brexit.

@PerKurowski ©

A “Council of Historical Advisers” should advice the Council of Economic Advisers, on the origins of bank crises

Sir, Gillian Tett discussing Afghanistan’ Gandamak writes about the importance of knowing where you come from to know where you would want to go. “History lessons would be good for the White House” September 3.

Indeed, and I sure hope the “Council of Historical Advisers” comes to fruition, since the Council of Economic Advisers, and the Basel Committee, sure need some history lessons about the origins of bank crises.

Currently the pillar of bank regulations, is the risk weighted capital requirements for banks; more perceived risk more capital – less risk less capital.

And there is absolutely nothing in history that points to a banking crisis ever having resulted from what was, ex ante, when incorporated in their balance sheets, perceived as risky.

These have only resulted from unexpected events, or from the accumulation of excessive financial exposures to something erroneously perceived as safe. In fact the safer something is perceived, the worse the unexpected consequences that could result. Motorcycles are correctly viewed as much riskier than cars… and therefore much more people die in car accidents than in motorcycle accidents.

To sum it up, the risk weighted capital requirements for banks, dangerously distort the allocation of bank credit to the real economy, for no good reason at all. 

@PerKurowski ©

September 02, 2016

Should bonds that finance violations of human rights have to be repaid?

Sir, I find it hard to comprehend the big raucous one can often hear about financing what endangers the environment, or companies that employ children; and then reading “Venezuela’s hospitals do not have medicine, the stores do not have food or toilet paper, but there is an almost surreal confidence that bondholders will do quite well out of the coming restructuring, even with the damage done by governmental incompetence and corruption” “Chaos reigns as Caracas makes every effort to please foreign bondholders” John Dizard, September 3.

Sir, what if the International Court of Justice decided, as it should, those bonds should not be paid, on account they were financing the violation of human rights?

I have been for many years, soon many decades, been voicing support for the need of a Sovereign Debts Restructuring Mechanism, but that SDRM must begin by defining very clearly what is to be considered as odious credits and odious borrowings. If not, We the People, will get screwed.

Is Venezuela violating human rights? There’s food and medicine scarcity, and people are dying because of it, but petrol (gas) is being given away at US$ 1cent per liter (US$ 4cents per gallon). So you tell me!

@PerKurowski ©

If they do not belong to her The Group, the tribe, Gillian Tett does not seem to read what her readers write to her.

Sir, Gillian Tett writes “Echoes of 2008 as danger signs are ignored ” and mentions the “Jackson Hole tribe barely mentioned these at all”. “We had all better hope that by the summer of 2017 a debate about finance gets a proper billing at Jackson Hole” September 2.

I invite you here to read the probably more than hundred letters I have sent Ms Tett over the years, but that she has decided to ignore, probably because I do not belong to her The Group.

Who am I? Just a former Executive Director of the World Bank who, in October 2004, in a formal statement delivered at the Board wrote:

“Phrases such as ‘absolute risk-free arbitrage income opportunities’ should be banned in our Knowledge Bank. We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

In January 2003, in FT, I warned “that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”


So what would I like Ms Tett to do? To be more than a groupie and do her job asking those she might meet in Jackson Hole, Davos and similar The Group meetings, some of the too many questions that have gone unasked by journalists over the last soon 30 years, like:

How have you defined the purpose of banks before regulating these?

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

Why do you base your capital requirements on the ex ante perceived risks?

May God defend me from my friends. I can defend myself from my enemies” Voltaire.

Had Tett, or any other important financial journalist, like Martin Wolf, asked some of these questions much earlier, we might not have the need to even reference 2008.

The Basel Accord, Basel I, 1988, set the risk weight of the Sovereign at 0% and that of We the People at 100%... which de facto means that regulators believe government bureaucrats give better use to bank credit than the private sector… something that most of us on Main Street and who are not runaway statists, would find sort of questionable.

@PerKurowski ©

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

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

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

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

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

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

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

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


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

@PerKurowski ©