Wednesday, June 24, 2015

Bank regulators… dare to answer this single question

There are literally thousand of risks, especially many unexpected risks, which could bring our banking system down.

And so why on earth did you regulators base your capital requirements for banks, those which are to cover especially for unexpected risks, solely on the ex ante perceived credit risk, that which is basically the only risk already cleared for by banks, by means of interests risk premiums and the size of their exposures?

And, to top it up, you made those capital requirements portfolio invariant… as if diversification has no meaning?

If anything, should you not have based it on the risks that bankers were not able to clear for those perceived risks?

Since that dangerously distorts the allocation of bank credit to the real economy, do we not deserve a clear-cut answer on that?

I have been asking this for over a decade, and you have not even wanted to acknowledge my question. Does that not tell you something?

Tuesday, June 23, 2015

If the US stops distorting the allocation of bank credit to the real economy… does Europe dare to be left behind?

For 6.000 (out of 6.400) traditional US banks those that hold, effectively, zero trading assets or liabilities; no derivative positions other than interest rate swaps and foreign exchange derivatives; and whose total notional value of all their derivatives exposures - including cleared and non-cleared derivatives - is less than $3 billion...

Thomas M. Hoenig, the Vice Chairman of the FDIC is proposing the following:

“A bank should have a ratio of GAAP equity-to-assets of at least 10 percent. The substantial majority of [US] community banks already have equity-to-asset ratios of 10 percent or higher, and the number is in reach for those that do not.”

“Exempting traditional banks from all Basel capital standards and associated capital amount calculations and risk-weighted asset calculations.”

If approved, that would effectively mean the US begins to distance itself from the pillar of Basel Committees bank regulations, the credit-risk-weighted capital requirements.

Since those capital requirements odiously discriminate against the fair access to bank credit of borrowers deemed “risky”; and thereby distorts bank credit allocation, that would mean that most US banks would be able to return to real lending to the real economy.

Does Europe dare to be left behind in such development?

PS. Its about time the US suspended such regulatory discrimination, which should never have been allowed, according to the Equal Credit Opportunity Act (Regulation B)

Monday, June 22, 2015

Suppose a dictator decided on bank regulations.

What if in a country there was a dictator who told banks: I will allow you to leverage much more your equity, so that you can earn much higher risk adjusted returns on your equity and on the implicit support our taxpayers give your banks, that is as long as you lend to the government, meaning to me, your infallible sovereign, to my friends and courtesans, the AAArisktocracy, and stay away from lending to those perceived as risky, like our quite vulgar SMEs and entrepreneurs.

Would you not be upset? Especially considering that it is precisely SMEs and entrepreneurs who most need to have fair access to bank credit in order to help the real economy to move forward and not to stall and fall.

Would you not be upset? Especially considering that de facto means the dictator believes the government, or the AAArisktocracy, can use bank credit more efficiently than what SMEs and entrepreneurs can?

Would you not be upset? Especially considering that never ever do major bank crises result from excessive bank lending to those perceived as risky, these always result from excessive lending to those who were erroneously perceived as safe.

For your information, the Basel Committee, and the Financial Stability Board, with their portfolio invariant credit risk weighted capital requirements for banks, dictated precisely that... for the whole world. And the world so submissively, says nothing about it.



Sunday, June 21, 2015

How do you explain to grownups the benefits of compound interests in times of zero or negative interest rates?

The Washington Post carried a story on June 21 titled “Where broke millennials go to learn aboutmoney – Financial planning for grownups.

In it its author Jonelle Marte, writes about a wine-tasting meeting organized by the Society of Grownups, in which “Stephanie Labelle was busy jotting notes as financial planner Jena Palisoul explained compound interest”.

And I was left wondering about how you go about and explain the benefits of compound interests, in times of zero or even negative interest rates.

Also, if I had been there to advise these young adults on the best way to guarantee their future I would, without a shadow of a doubt, told them to get rid of current bank regulators with their senseless risk-aversion. 

The currentcredit-risk-weighted capital requirements, make banks invest in assets much more compatible with the investment needs of a retiree with very few years of life expectancies, than with those of young grownups… those who needs banks to finance “risky” SMEs and entrepreneurs, in order to have the economy going and generating jobs.

Actually I would suggest the Society of Grownups writing the regulators a kind letter reminding them that major bank crisis are never ever caused by excessive exposures to what is perceived as risky, but always from too large exposures to what has been erroneously perceived as very safe.

Saturday, June 20, 2015

Where could truly dangerous really unexpected events occur the most?





REALLY UNEXPECTED? THINK IT THROUGH?

Bank capital is to be held against unexpected losses because the expected losses derived from the perceived risks are already cleared for by smaller exposures and higher risk premiums,

The Basel Committee for banking supervision considered the dangerous looking forest had the greatest potential of the unexpected...

and therefore decided to require banks to hold the greatest capital when entering the dark scary forest (with its expected risks) than when entering that beautiful field (with its little expected risks).

Smart or extremely dumb?

Extremely dumb no doubt: That's why banks loaded up on what was perceived as safe, like AAA rated securities, like loans to Spanish real estate, like loans to the government of Greece... and do not give loans to those "risky" SMEs and entrepreneurs... who can help or economies to move forward, in order not to stall and not to fall.



  
  

      

Friday, June 19, 2015

Is the problem with our bank regulators a lack of testosterone?

We have read a lot about excessive testosterone levels producing excessive risk taking, for instance in banks. But, could a deficiency of testosterone equally produce an excessive risk aversion.

Let me explain. Even though the credit risks perceived by bankers are already cleared for by means of the size of the exposure and risk premiums, current bank regulators imposed on banks higher capital requirements for what is perceived as risky than for what is perceived as safe. 

And the above is like adding up the risk aversion of two nannies before deciding what the children can do; and so of course the children are not allowed to do much; and so of course banks will lend too much to the “safe” and too little to the “risky”… and so of course there is a monstrous distortion of the allocation of bank credit to the real economy.

To top it up, it does not serve any stability purpose, since all major bank crises have always resulted from excessive exposures to what was erroneously considered “safe” and never ever to something correctly perceived as risky.

This, being so scared of what is perceived as risky and so little suspicious of what is perceived as safe, is so loony that perhaps it points to a hormonal imbalance. Could it be that current bank regulators have a serious lack of testosterone?

I, as many others, suffer from too much risk aversion, and so I could be suffering from that lack of testosterone too. But, in me, that deficiency presents no major problem, except perhaps for my kids who might therefore not inherit what they could inherit. But, when the testosterone deficiency is present in those who regulate our banks, then we are talking about that kind of systemic illnesses that can even bring a Western world down on its knees.

PS. Again. If you lend too much to what is perceived as risky and too little to what is perceived as safe, then it might be because of excessive testosterone… why then can if you lend too much too what is perceived as safe, and too little to what is perceived as risky, not be a lack of testosterone?

Thursday, June 18, 2015

This is the so sad totally ignored important historic turning point event of the whole Western civilization.

In 1988, the G10 countries, signed up on the Basel Accord. With it, with Basel I, the regulators imposed on banks capital requirements based on ex-ante perceived credit risks.

And the risk weight assigned to the private sector was 100 percent, while the risk weight assigned to their governments was zero percent.

That meant banks needed to hold NO capital when lending to their governments, but 8 percent when lending to the private sector (the basic Basel 8 percent standard capital requirement, multiplied by the risk weight).

That meant that banks could leverage their equity and the support they explicitly and implicitly received from taxpayers infinitely, when lending to their governments, but only about 12 to 1, when lending to the citizens.

That meant in essence, that the regulators decreed that government bureaucrats would be able to use bank credit much more efficiently than the private sector.

That meant in essence, that the free Western world signed up to communistic precepts.

Is that not a historic turning point for our Western World? Tell me, how many times have you heard this being discussed?

And then, in 2004, with Basel II, regulators decided that the risk weight for those private sector borrowers rated AAA to AA was to be 20 percent, while for the unrated ordinary citizens and their SMEs, it remained 100 percent.

And that meant that regulatory risk aversion was also introduced with respect to bank credit to the private sector in the Western world... making it impossible for SMEs and entrepreneurs to have fair access to bank credit.

And since that its been going down down down and these two sad historical event are still being ignored.

Any civilization unwilling to take risks will stall and fall.

Tuesday, June 16, 2015

Greece was taken down by loony statist technocrats or by hard line communists, acting as bank regulators.

More than six years ago, in jest, but also in all seriousness, I set up a blog named AAA-bomb. In it I recounted the actions of “Carlos Molotov Pavlov, a central planner who to avenge his loss of a cushy job in the Soviet entered the bank regulatory system in Basel and managed to create, seed and detonate an AAA-bomb in the heart of the capitalist Empire” 

Already in 1999 in a Op-Ed I had written: “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 collapse of our banks”.

The AAA-Bomb, which had partly already been invented in 1988 with the Basel Accord but that was much further refined in 2004 (Basel II) was the credit-risk-weighted capital requirements for banks.

While these required banks to hold 8 percent in capital when lending to any unrated SME in Europe these allowed banks, in accordance to how Greece was then rated, to lend to government of Greece against only 1.6 percent in capital. So banks could leverage their equity, and the support they received from taxpayers, over 60 times lending to Greece compared to only about 12 times to 1 when lending to a German or a Greek SME.

Of course that had to mean sovereigns were going to become over-indebted… and Greece was just one of the AAA-bomb's first casualties.

Sunday, June 14, 2015

Mark Twain vs. The Basel Committee for Banking Supervision… Who do you think is right?

Mark Twain is supposed to have said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” 

The Basel Committee though, with its credit risk weighted capital requirements for banks, evidently argues: A banker lends you the umbrella when it rains but want it back when the sun shines”. 

I mean, otherwise, as regulators wanting banks to hold capital against unexpected losses, would it require banks to hold much more capital when lending to “the risky”, those in the rain, than when lending to “the safe”, those enjoying the sun? 

I side a hundred percent with Mark Twain… because I have never ever seen a major bank crisis that has resulted from bankers lending too much to those they perceive as being in the rain, these have always resulted from lending too much to those they believe find themselves in the sun.

If you think that would seem to mean I believe those in the Basel Committee have no idea of what they are doing… you are absolutely right… I don’t.

It is tragic. The direct consequences of what the Basel Committee is doing, is that banks will now earn much higher risk adjusted returns on what is in the sun than on what is in the rain, and therefore only lend the umbrella to those they see in the sun, and stay away entirely from lending to those they see in the rain... like to all the "risky" SMEs and entrepreneurs, those  who could create the future jobs our grandchildren will need.



Friday, June 12, 2015

The Minsky "displacement" that caused the ongoing crisis, was the credit risk weighted capital requirements for banks.

I cite from Charles P. Kindleberger’s “Manias, Panics and Crashes” 1978.

“Financial crisis are associated with the peaks of business cycles… the culmination of a period of expansion.

According to Hyman Minsky, events leading up to a crisis start with a ‘displacement’ some exogenous, outside shock to the macroeconomic system. The nature of this displacement varies from one speculative boom to another. It may be the outbreak or end of a war, a bumper harvest or crop failure, the widespread adoption of an invention with pervasive effects – canals, railroads, the automobile – some political event or surprising financial success, or a debt conversion that precipitously lower interest rates. But whatever the source of the displacement, if it is sufficiently large and pervasive, it will alter the economic outlook by changing profit opportunities in at least one important sector of the economy. Displacement brings opportunities for profit in some new or existing lines, and closes out others… a boom is under way.

In Minsky’s model, the boom is fed by an expansion of bank credit which enlarges the total money supply… Bank credit is, or at least has been, notoriously unstable and the Minsky model is based squarely on that fact.” End of quote


In 1999 in a Op-Ed in 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 collapse of our banks” 

And I have no doubt that the systemic error, the Minsky displacement that brought on the credit expansion that resulted in the financial crisis of 2007-08, was the introduction by regulators of credit risk weighted capital requirements for banks.

That facilitated a tremendous credit expansion by allowing banks to hold absolute minimum equity against assets perceived as safe. We are talking about zero percent when lending to sovereigns (Basel I 1988) to 1.6 percent when lending to the private sector rated AAA to AA (Basel II 2004).

And allowing for such minimum equity, while still lending the banking sector much implicit and explicit government support, made possible immense leverages and thereby immense risk-adjusted returns on bank equity on assets perceived as safe, while closing out the fair access to bank credit for all those perceived as “risky”, like the SMEs.

And today, soon a decade later, that “displacement” which completely distorted the allocation of bank credit to the real economy has not even been acknowledged much less corrected.

PS. Read Charles P. Kindleberger’s “Manias, Panics and Crashes” and you will not find one evidence that supports current credit risk weighted capital requirements for banks… unless perhaps they are 180 degrees the opposite: higher for what is perceived as safe and lower for what is perceived as risky.

PS. In the Wikipedia on Hyman Minsky, I do not agree with how Paul McCulley translates the Minsky's hypothesis to the subprime mortgage crisis ignoring the minimum bank capital requirements associated with the AAA rated securities backed with mortgages to the subprime sector.

Tuesday, June 2, 2015

Are some consulting companies, e.g. McKinsey & Co. Too-Big-To-Think?

A book, “No ordinary Disruption”, which I paid for, arrived with my mail today. The authors are Richard Dobbs, James Manyika, Jonathan Woetzel all belong to McKinsey Global Institute, the economics and business research arm of the management-consulting firm McKinsey & Co

From its introduction “An intuition reset” I quote:

“Dramatic changes come from nowhere, and then from everywhere… The fortunes of industries, companies, products, technologies, and eve countries and cities rise and fall overnight and in completely unpredictable ways.”

That is true but it makes me ask: Where was McKinsey & Co when bank regulators decided that their capital [equity) requirements for banks, those that are expected to cover for unexpected losses, were to be based on the predictable expected losses derived from the ex ante perceived credit risks?

Why on earth should banks need capital against perceived credit risks, when what is perceived cannot really be what is that dangerous? 

And the McKinsey authors identifying their “Four great disruptive forces” list: (1) the locus of economic dynamism shifting to emerging markets like China; (2) the impact of technology; (3) demographics; (4) “The final disruptive force is the degree to which the world is much more connected through trade and through movements in capital, people, and information. 

But they leave out that monstrous source of disruptive force that can emanate at any moment from sheer regulatory stupidities with global reach. Why? 

And I ask this because I am convinced that McKinsey & Co., somewhere deep in its bowels, must have known that: allowing banks to hold so little equity against some assets, only because these were perceived as safe, had to end in tears; and that allowing for different capital requirements for different assets, based on perceived credit risk already cleared for, had to dangerously distort the allocation of bank credit to the real economy.

The authors present us with the management imperative for the coming decade, namely: “To realize that much of what we thought we knew about the how the world works is wrong.”... 

Wrong! That’s no excuse, McKinsey & Co. involved in so many areas should have known that when regulating banks you must do two things: First define what’s the purpose of banks, something which was not done; and second analyze what caused bank crises in the past… and it sure was not what was perceived as risky but always what was ex ante perceived as safe but that ex-pots turned out risky.

So if there is a management imperative for the next decade that should be: To realize why so much we think about how the world should work could turn out to be so fundamentally wrong; and how to avoid to become a silly mutual admiration club prone to groupthink.

When a consulting group is no longer able to freely question what’s going on, to freely be able to call the bluff of what’s dumb, then it will have grown too big. It will be weighed down by too many conflicts of interests of all nature; which hinders it from speaking or even thinking the truth… and finally, very sadly, it will end up as a highly paid endorser of stupidities.

When a consulting group with global reach reaches a point of too much importance, then it also becomes a dangerous source of systemic risks.

So do we now need capital requirements for banks based on the size of the consultant group they use? J

Wednesday, May 27, 2015

Current bank regulations present two absolute inexplicable lunacies, which can only be justified if you are a communist

Starting 1988, with the G10 Basel Accord of which the US is a signatory, bank regulators, in Basel I, for the purposes of establishing how much capital (equity) banks need to hold against assets, declared the following credit-risk-weights: Government Zero percent; citizens, or their SMEs, 100 percent.

Knowing that only the citizens are the real back up of any government, and that governments can be very creative dishonoring their debt, for instance by means of inflation… that is an absolute inexplicable lunacy... unless you’re a communist of course.

Worse yet. Those risk weights cause banks to lend more and at lower relative rates to the government than to the citizens and to their SMEs. And that would imply that government bureaucrats are more productive using bank credit than the citizens, or their SMEs.

In other words, the credit-risk-weights de facto simultaneously translates into bank-credit-productivity-weights of 100% for government bureaucrats and zero percent for citizens, or for their SMEs. 

And so the question lingers is the Basel Committee a tool for communists to infiltrate the financial system of the free world? It would certainly seem so.

Tuesday, May 26, 2015

The Basel Committee’s credit-risk weighted capital requirements for banks, is a leading cause of falling productivity

For the purpose of establishing how much capital (equity) banks need to hold against loans, the Basel Accord (Basel I), Basel II and Basel III defined the following credit-risk weights: Governments 0%; SMEs and entrepreneurs 100%.

I believe that to be absolutely crazy… but regulators won’t listen to me.

But those credit risk weights also de facto translates into that the Basel Committee deems the risk that bank credits are not used productively to be: Government bureaucrats = 0%; SMEs and entrepreneurs = 100%.

And that is of course even crazier… but regulators will still not listen to me.

Now when we reading about so many concerns with the lack of productivity in many economies… will anyone help me to explain to the Basel Committee the connection that exists between their credit-risk-weights and the falling productivity of economies?

Is it not time to think a little bit about productivity weights too?

Saturday, May 23, 2015

When are we going to fine or shame the regulators, The Great Distorters, The Great Manipulators of bank-credit markets?

Of course I do not mind banks paying fines because of their misbehaving though I would like these fines to be paid with shares of the banks, since requiring these to be paid in cash, which weakens the banks, sounds like societal masochism to me.

But what I really would like to see, if not being fined, bank regulators being shamed for the horrible distortion, the horrible manipulation, their credit-risk-weighted requirements have caused to the allocation of bank credit to the real economy.

And all that distortion and all that manipulation for absolutely no reason… since major bank crises never result from excessive bank exposure to what is ex ante perceived as risky.

Just to think of all those potentially opportunity and job creating credits that have been and are negated to SMEs and entrepreneurs, only because regulators believe themselves able to manage the banking-risks for the world, makes me cry for all those Millennials, and their descendants, who will have to live with the consequences of these stupid risk-adverse Baby-boomers.

And some of these regulators are even ideological infiltrators… because how else can one describe anyone who comes up with the notion of assigning a zero-risk-weight to the government, and a 100 percent risk weight to the citizens who represent the only back-up of that government.

Wednesday, May 20, 2015

When are we going to get regulators concerned with banks allocating credit efficiently to the real economy?

I just wonder… because clearly current bank regulators do not care one iota about that.

If they did they would not have concocted their silly credit-risk-weighted equity requirements for banks which allow banks to earn much higher risk adjusted returns on equity lending to “the safe” that when lending to “the risky.”

And that of course means banks will lend much too much to "the safe" and much too little to "the risky"

Tuesday, May 19, 2015

Compared to The Really Great Distortion by the Basel Committee, The Economist’s Debt/Tax Distortion seems smaller.

The Economist makes some good points about the distortion produced by the tax deductibility of borrowing costs, “The great distortion” May 16.

Indeed but compared with the distortions produced in the allocation of bank credit by the credit-risk-weighted requirements for banks, those distortions seem minor. The distortion The Economist refers to, favors debt over equity, and produces a suboptimal debt/equity mix. The distortion current bank regulations cause affects the access to debt. Those perceived as safe, and who therefore already have better access to bank credit, will have even more so. And those perceived as risky, and who therefore already have difficulties accessing bank credit will have even less so. And that, which kills opportunities, is a real potent inequality driver.

The Economist writes: “Corporate financial decisions are motivated by maximizing the relief on debt instead of the needs of the underlying business.” But in the same vein, minimizing equity is now more important for banks maximizing the risk-adjusted returns on equity, than looking out for worthy borrowers.

In the briefing “Ending the debt addiction”, “the implicit government guarantee that props up big banks” is identified as a distortion. But that implicit guarantee is made much larger, and regressive, by the fact that it can be leveraged much more when lending to the safe than when lending to the risky.

I am glad to see The Economist could favor “to abolish corporate tax entirely- and instead have one layer of tax levied on the income individuals receive from investments in firms. That is indeed something that I have often proposed, like in “My tax paradise

Where I differ strongly with The Economist though, is when it refers to the lower tax revenues government receives because of the deductibility of interest on debts as “a cost in forfeited tax revenues”. Refer to it only as "lower tax revenues", instead of a “cost”, it can sometimes signify a benefit… for all. Besides how much tax is paid yearly because of the higher property values?

Monday, May 18, 2015

The World Bank spoke out way too softly on faulty bank regulations, and finance ministers did not read carefully enough.

World Banks' The Global Development Finance 2003 (GDF-2003), “Striving for Stability in Development Finance” had this to say on Basel II, pages 50-52

“The new method of assessing the minimum-capital requirement [proposed by the Basel Committee for Banking Supervision (BCBS)]… will be explicitly linked to indicators of credit quality… The regulatory capital requirements would be significantly higher in the case of non-investment-grade emerging-market borrowers than under Basel I. At the same time, borrowers with a higher credit rating would benefit from a lower cost of capital under Basel II….

A recent study by the OECD (Weder and Wedow 2002) estimates the cost in spreads for lower-rated emerging borrowers to be possibly 200 basis points.”

What did the World Bank say with that?

It said that regulatory capital requirements would distort more than the previous Basel I did, the allocation of bank credit.

What did finance ministers of developing countries do?

They did not protest that as an outrageous odious discrimination of bank lending to countries like theirs that are naturally perceived as more risky.

What did finance ministers of developed countries do?

They did not understand that their own “risky”, the SMEs and entrepreneurs, would be exposed to exactly that same odious discrimination.

I, at that time an Executive Director of the World Bank, mostly representing developing countries, when commenting GDF-2003 formally stated:

“the document does not analyze at all a very fundamental risk for the whole issue of Development Finance, being that the whole regulatory framework coming out of the BCBS might possibly put a lid on development finance, as a result of being more biased in favor of safety of deposits as compared to the need for growth. Even though, in theory, we could agree that there should be no conflict between safety and growth, in practice there might very well be, most specially when the approach taken is by substituting the market with a few fallible credit rating agencies.”

And a couple of weeks later, also formally at the Board of the World Bank I held: “BCBS dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In BCBS’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. Once again, the World Bank seems to be the only suitable existing organization to assume such a role."

Now I hear some talking about that the World Bank is becoming irrelevant. Forget it! It could be more relevant than ever… but for that it has to be able to stand up for the risk-taking our children needs for us to take in order for their children to have a future.

PS. Come to think of it. The World Bank has been mum on this regulatory distortion of the allocation of bank credit to the real economy. Why? Does it not even listen to itself?

Saturday, May 16, 2015

Today I got to be 65, and so I give myself a list of some of my ramblings on bank regulations, in no special order.

The current pillar of bank regulations “more-perceived-risk-more-equity and less perceived risk less equity” is absolutely wrong, but might intuitively seem too correct so as to allow Daniel Kahneman’s System 2 even to begin its deliberation.

Today banks compete to obtain higher returns on equity more by reducing the equity needed that by identifying those who pay the highest risk adjusted margins.

Today the dollar in net risk adjusted margin paid by those perceived “safe” is worth more to the bank than that same dollar paid by “the risky”.

If you have regulators that do not understand that different equity requirements affects the risk-adjusted returns on equity of assets, which dangerously distorts the allocation of bank credit to the real economy…then you’ve got to change your bank regulators… urgently.

If you have regulators that do not understand that the perceived risk of bank assets does not matter since what is important is how the banks manage those perceptions of risk…then you’ve got to change your bank regulators… urgently.

If you have regulators that do not even look at the empirical evidence of what has caused all major bank crisis, never something perceived ex ante as risky, always something erroneously perceived ex ante as safe...then you’ve got to change your bank regulators… urgently.

If you have regulators who cannot manage the differences between ex ante perceived risks and ex post realities, and so can understand that what really poses dangers for the banking system at large are assets perceived as “safe”… then you’ve got to change your bank regulators… urgently.

If you have regulators who regulate banks without clearly defining their purpose… then you’ve got to change your bank regulators… urgently... because then the current ones would only be freaking dangerous vigilantes. 

If you have regulators who believe they have the right to odiously discriminate against the fair access to bank credit of those perceived as "risky", SMEs, entrepreneurs and start-ups… then you’ve got to change your bank regulators… urgently.

If you have regulators who believe they have the right to specially favor the fair access to bank credit of those perceived as "safe" sovereigns and members of the AAArisktocracy… then you’ve got to change your bank regulators… urgently.

If you have regulators who set the weights for capital (equity) requirements for banks when lending to government at 0%, and at 100% when lending to SMEs, which means that banks will lend more and at lower relative rates to the government than to the SMEs… that means de facto they believe that government bureaucrats are more productive using bank credit than SMEs… and then you’ve got to change your bank regulators… urgently... because then the current ones would only be freaking dangerous communists

Had regulators thought abut the “what are banks for?”, they would have known that banks are to allocate credit efficiently to the real economy, and they would never have concocted those highly distortionary credit-risk weighted equity requirements for banks.

A different take on the previous, is that the first step of any good risk management, is to clearly identify the risks you cannot afford not to take.

Few things are as risky as an excessive risk aversion.

Why is so much discussed about excessive risk-taking… and so little about excessive risk aversion?

Risk taking is the oxygen of development and we owe it to our kids and grandchildren that banks take risks with reasoned audacity. Nothing as dangerous, as excessive risk avoidance. God make us daring!

Our grandchildren will damn current bank regulators for denying them the risk-taking needed for them to find decent jobs.

Banks do not finance the risky future anymore they just refinance the safer past.
  
Bank regulators recommended banks an investment strategy fitting old retirees with short life expectancies and completely ignored the need of our young ones.

The best macro-prudential regulations is one of micro-prudential regulations that help banks to fail… fast… not the current micro-prudential regulation, which only helps to create too big to fail banks.

Mini-bank-equity requirements are the best growth hormones for the too big to fail banks.

Perfect information makes everyone to stay in bed… why bother, there’s not going to be any real profits? Blissful ignorance and imperfect information is a great driver of the economy.

Don’t ever allow a failed regulator to get away with the “this was a Black Swan, a totally unexpected event, a completely unforeseen consequence” excuse.

If a regulator tells you that the risk-weight of a sovereign is 0% but the risk weight of the citizens of that sovereign is 100%, then the regulators is not a regulator, only a communist.

If the Home of the Brave were really the Land of the Free, would they have allowed the current risk aversion in bank regulations?

With an Equal Credit Opportunity Act (Regulation B) how come regulators are allowed to discriminate against somebody’s access to bank credit only because he is perceived as risky from a credit point of view?

How can a Governor allow that his state chartered banks can lend, for instance to Germany, against much less equity that when lending to a local entrepreneur? 

Hold your bank regulators accountable. If they fail like they did with Basel II, do not promote them, and much less allow them to design Basel III. Neither Hollywood nor Bollywood would never ever do a stupid thing like that, after a mega box-office-flop.

Do not allow regulators to regulate within the confinement of a mutual admiration club. That only guarantees degenerative groupthink.

Without regulators and regulations, how many banks, like those in Europe, would have been allowed to leverage their equity 30 to 50 times to 1? ¡Zero¡ 

When you regulate, remember that every rule carries in it the seeds of being a systemic risk that can explode as a truly dangerous systemic error.

If your Homeland Security cannot visualize that bad distortive bank regulations could be even more dangerous than a full fledge terrorist attack… then you’ve got to refresh your Homeland Security

If you have progressives who do not understand how higher bank equity requirements when lending to those perceived as risky kills opportunities and drives inequality, then you better get yourself some new progressives.

If you have some free-market defenders that do not see how regulators, with their credit risk weighted equity requirements for banks, impose capital controls on where bank credit should go, and accept to talk about a de-regulated market, then you better get yourself some new liberals.

Finance professor’s in university that do not care about such “vulgar” issues as bank regulations and how these can influence the economy should be send to a boot-camp for a refresher. There they could for instance learn that the risk-free rate they are using is currently a subsidized risk free rate.

Anyone talking about de-regulation when we are in fact facing one of the most intrusive and distortive regulations ever… has been brainwashed.

While current regulatory distortions exists the QEs are just a waste, since these only help to increase the value of the existing assets… sometimes by even reducing what there is… like with the buybacks of shares.

“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 collapse of our banks.”

The whole regulatory framework coming out of the Basel Committee for Banking Supervision might possibly put a lid on development finance, as a result of being more biased in favor of safety of deposits as compared to the need for growth.

“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”

But... being too right is too bad for your own voice

Unless blessed with eternal ignorance, how can bank regulators live with themselves knowing what they are doing?

How naïve and infantile is it not to believe that what is perceived as risky is what is really risky?

PS. I will be editing and adding on to this points whenever I remember any other of my ramblings.

Wednesday, May 13, 2015

What are we to do with immoral and dumb dumb bank regulators?

Current bank regulators, with the Basel Accord of 1988, and further with their Basel II in 2004, decided to concoct and impose credit-risk weighted requirements for banks…more-risk-more-equity and less risk-less-equity.

That results in that bank can leverage more, and therefore obtain higher risk adjusted returns on their equity, and on the implicit and explicit support of taxpayers, when lending to “the safe” than when lending to “the risky”.

That constitutes a regulatory bias in favor of those who already are favored by bankers because they are perceived as safe, which results in an immoral and odious discrimination against “the risky”, those who are already naturally discriminated against by bankers.

And it is dumb because that distorts the allocation of bank credit to that real economy on which our pensions, our children and grandchildren’s future, and even our banks long-term safety depends upon.

And it is also dumb because never ever have major bank crisis resulted from excessive exposures to what was ex ante perceived as risky, these have all resulted from excessive exposures to what was ex ante perceived as safe but that ex post turned out to be very risky.

So what are we to do with these immoral and dumb dumb bank regulators? The Basel Committee and the Financial Stability Board, they don't even acknowledge that there is a problem.

PS. By the way, what are regulators really doing when they assign a zero risk weight to the government and a 100 percent risk weight to an unrated citizen? Does that not give out a very strong stench of communism?


Monday, May 11, 2015

Dumb bank regulators clearly evidence we need artificial intelligence, at least as a backup

Banks fail because: they cannot perceive the risks correctly, they cannot manage the correctly perceived risks correctly, or suddenly something truly bad an unexpected happens… like the economy falling to pieces.

So if banks should be required to hold equity, in order to build up a buffer before they need help from taxpayers, those equity requirements should be based on: the credit risks not being correctly perceived, the bankers not being able to manage perceived risks, and something truly not expected happening, like an asteroid hitting their borrowers.

But, the Basel Committee for Banking Supervision, based its equity requirements for banks on the ex ante credit risks being correctly perceived… and that is nothing but loony. 

Besides they regulate banks in thousand of pages, without defining what the purpose of banks is… and that is nothing but absolutely irresponsible.

Any artificial intelligence worthy of its name would have made two simple questions.

What is the purpose of banks?

What has caused major bank crisis?

And how different and better the world would then have been. We could surely have had other type of problems, but definitively not the current crisis, caused by excessive lending to what was ex ante perceived as safe; nor the current lousy economy, caused by the lack of lending to those perceived as “risky”, like the SMEs, precisely the tough we need to get going when the going gets tough.

Our grandchildren will damn current bank regulators, for not allowing banks to take the risks their future needs.