Thursday, February 11, 2016
Patrick McHenry (R-North Carolina) asked Fed chair Janet Yellen about the Fed's legal authority to implement negative rates… And seemingly it is a bit unclear.
But he should also have asked:
Is it really legal for the Fed to support bank regulations that require banks to hold more capital against loans to The Risky than against loans to The Safe?
I ask since that allows banks to leverage more their equity and the support we gve them when lending to The Safe than when lending to The Risky.
And that allows banks to earn higher expected risk adjusted returns on equity when lending to The Safe than when lending to The Risky
And therefore that favors the access to bank credit of those perceived as safe, and thereby discriminates against the fair access to bank credit of those perceived as risky.
Are not The Risky already discriminated enough by the sole fact they are perceived as risky and therefore receive less and more expensive credit?
Does not the real economy suffer when the allocation of bank credit is distorted this way?
Has this not introduce a regulatory risk aversion in The Home of the Brave?
And how does this make banks more stable? Are not the big bank crises always detonated by something perceived as very safe that later turn out very risky?
Tuesday, February 9, 2016
The Tier 1 Common Capital Ratio, to the Leverage Ratio, gives you the Hiding the Risks (in the bank) Ratio.
The Tier 1 common Capital Ratio uses in the denominator risk weighted assets, calculated with risk weights not assigned by me… the safer an assets is perceived to be or is deemed to be the lower its value.
The Leverage Ratio uses in the denominator the gross value (of most) assets.
Since I have always felt much more nervous about the assets a bank perceives as very safe compared to the assets it perceives as risky, I give much more importance to the Leverage Ratio, than to the Tier 1 Common Capital Ratio.
But the regulators would not allow me the data on the Leverage Ratio, because, in their opinion, that would not reveal the real leverage to me… it would only confuse me.
And so they decided to credit-risk weigh the assets, and came up with the Tier 1 Common Capital Ratio.
And that made many in the market feel very much more comfortable with that the banks were quite adequately capitalized.
But one has to adapt, and so I felt that there was a new very interesting Ratio to be found in the market whenever the Leverage Ratio was published. And that was the Tier 1 Common Capital Ratio to the Leverage Ratio Ratio, because that Ratio would represent the Hiding Risks Ratio.
Deutsche Bank reported at the end of 2015 Tier 1 Common Capital Ratio of 11.5% and a Leverage Ratio of 3.6%, and that would signify a 319 percent Hiding Risks Ratio. I am not sure it is the highest… but it is sure high enough to make me very nervous.
Monday, February 8, 2016
The governments must stop their bureaucrats/technocrats from meddling dangerously with banks and the real economy.
The Basel Committee first published their Core Principles for effective banking supervision in 1997, their “de facto minimum standard for sound prudential regulation and supervision of banks”. The latest version, from 2012, now includes 29 Core Principles.
It makes for a harrowing read. Of the 29, 16 have explicitly to do with what the supervisor “determines”, “sets”, “defines” or “requires”. And Principles 8 and 9, on the Supervisory Approach Techniques and Tools to be used when regulating banks, reads like an arrogant meddling bureaucrat’s wet dream.
There is not one single reference to the possibility that regulations could, with tragic consequences, interfere with the allocation of bank credit to the real economy.
Consider their Principle 16 – on capital adequacy: “The supervisor sets prudent and appropriate capital adequacy requirements for banks that reflect the risks undertaken by, and presented by, a bank in the context of the markets and macroeconomic conditions in which it operates. The supervisor defines the components of capital, bearing in mind their ability to absorb losses.”
That lead to the pillar of current regulations the risk weighted capital (equity) requirements for banks. The higher ex ante perceived or deemed risk of assets the higher the capital requirement; the lower the ex ante perceived risk of assets the lower the capital requirement.
And that means banks can leverage their equity more with assets perceived as safe, than with assets perceived as risky; and that results of course in that banks earn higher expected risk adjusted returns on their equity on assets perceived as safe, than on assets perceived as risky.
And so that favored more than what was normal bank lending to The Safe, like sovereigns, the AAArisktocracy and housing; and hindered more than what was normal, any bank lending to The Risky, like to SMEs and entrepreneurs.
And since excessive bank lending, against too little capital, to what was ex-ante perceived as very safe but that ex post turns out as very risky, is precisely the stuff major bank crises are made of, bank regulators have set the whole bank system on course to major disasters.
And since insufficient lending to those who on the margin are most likely to move the economy forward, so as it will not stall and fall, like the SMEs and entrepreneurs, bank regulators have set the economy on course to major disasters.
And consider their Principle 17 – on credit risk: “The supervisor determines that banks have an adequate credit risk management process that takes into account their risk appetite, risk profile and market and macroeconomic conditions. This includes prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate credit risk (including counterparty credit risk) on a timely basis. The full credit lifecycle is covered including credit underwriting, credit evaluation, and the ongoing management of the bank’s loan and investment portfolios.”
And the question is… how can you have adequate credit risk management when regulators also force you to clear in the capital the perceived credit risk you already clear for when deciding the risk premium and the size of the exposure?
And also ask yourselves… Why should the risk adjusted expected net margin paid by the risky to the banks be worth less than that paid by the safe? And then you will begin to understand how this regulation curtail opportunities to access bank credit and thereby increases inequality.
In other words regulators, insufflated with exaggerated estimates of their own abilities, are leading our banks and our economies to disaster.
Basel Committee and you other scheming dumb regulators, “Thanks, Great Job! Next time please keep out of our banks.”
A bank would ordinarily require lower risk premiums for the purchase of a house by someone willing to make an important down payment, and who showed sufficient income to be able to service the mortgage, than the risk premium the bank would require for riskier ventures, like that of lending to SMEs or entrepreneurs... those who though risky, could best help us to create the next generation of decent jobs.
But now, ever since regulators allowed banks to leverage more their equity with “safe” housing loans than with loans to The Risky, that meant the risk premiums offered in the market for housing loans suddenly got to be worth much more in terms of risk adjusted returns on bank equity, than those offered by The Risky.
The consequence? More loans to housing, and much less loans to SMEs and entrepreneurs than would ordinarily have been the case without this distortion.
And so now we are doomed to live unsafely in our safe houses, because of the lack of jobs we need in order to repay mortgages and utility bills.
Thanks regulators! Great Job! Next time please keep out of our banks.
Governments, your prime responsibility is to profoundly distrust your own technocrats, and to block these from dangerously meddling with our real economies.
Friday, February 5, 2016
Obama, Republican and Democratic candidates, you should be very concerned with the mindset of your bank regulators.
The pillar of regulations designed to keep the banking system safe, is the risk weighted capital requirements for banks.
These, with Basel II, set the risk weight for ‘highly speculative’ below BB- rated assets to be 150%, while the corresponding risk weight, for ‘prime’ AAA rated assets, was set at 20%.
For a basic requirement of 8%, that meant banks needed to hold 12% in capital against ‘highly speculative’ below BB- rated assets, while only 1.6 percent for ‘prime’ AAA rated assets.
That meant banks could leverage their equity, and all the support they receive from society, 8.3 times to 1 when holding highly speculative’ below BB- rated assets; and a mind-boggling 62.5 times to 1 with ‘prime’ AAA rated assets.
That of course distorts the allocation of bank credit to the real economy and, by favoring the access to bank credit for "The Safe", odiously discriminates against that of "The Risky", like SMEs and entrepreneurs.
As is that has banks earning higher risk adjusted returns on what is perceived as safe than on what is perceived as risky, which means banks no longer finance sufficiently the riskier future but mostly stick to refinancing the safer past. ,
And by negating The Risky their fair access to productive bank credit opportunities, inequality can only increase.
But, what I really cannot understand is: How come mature men (and women) can believe that what is rated below BB-, meaning is perceived as ‘highly speculative’, and therefore very risky, can be more dangerous to the banking system, than what is rated AAA, meaning ‘prime’, and therefore perceived as absolutely safe?
No! There has to be something fundamentally wrong with the current mindset of the bank regulators.
Such crazy risk aversion to perceived credit risk should, in The Home of the Brave, be deemed unconstitutional.
Wednesday, February 3, 2016
Basel global bank regulations: What blocked timely warnings from even being heard and much less considered?
Charles Goodhart has written “The Basel Committee on Banking Supervision: A History of the Early Years 1974-1997, 2011” For someone like me who became slightly aware of the existence of the Basel Committee in 1997 and who as an Executive Director of the World Bank 2002-04 questioned much of what it was up to, it is an extraordinary interesting book and I will comment it frequently… jumping all over it.
Close to the end, page 578, Goodhart writes. “The regulatory process itself is likely to exacerbate internal self-reinforcing dynamics… by introducing a single set of international standards, it tends towards making more banks behave in the same way at the same time (Alexander, Eatwell, Persaud and Reoch 2007). Thus it adds to the likelihood of crowded trades forcing major and sudden price readjustments”.
Precisely, in April 2003, a time during which Basel II was discussed, when commenting on the World Bank’s Strategic Framework 2004-06, I formally warned:
“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg. Once again, perhaps only the World Bank has the sufficient world standing to act in this issue.
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. Who could really defend the value of diversity, if not The World Bank?"
How do such comments become so totally ignored? Was it because I did not belong to any mutual admiration network of experts?
Monday, February 1, 2016
Is there anything more shortsighted short termism than credit risk weighted capital requirements for banks?
More ex ante perceived credit risk requires more capital – less ex ante perceived credit risk allows much less capital… that is the pillar of current bank regulations.
And that allows banks to leverage much more when lending to The Safe than when lending to The Risky; which means banks can earn much higher expected risk-adjusted returns on equity when lending to The Safe than when lending to The Risky.
And so banks do not any longer finance the riskier future, but keep to refinancing the safer past. If that is not short termism, what is?
Global Association of Risk Professionals (GARP) Have you no comments on bank regulators’ risk management?
One of the few and perhaps even only risks that banks clear for, with risk premiums and size of exposures, is the ex ante perceived credit risks, that quite often expressed in credit ratings.
But regulators did not find that sufficient and decided that banks should also clear for the same ex ante perceived credit risk, in their capital.
And as far as I understand any perceived risk, even if it is perfectly perceived leads to the wrong action if it is excessively considered. Would you agree GARP?
And if I was a bank regulator I would be much more interested in why banks fail than in why their borrowers fail. Wouldn’t you be too GARP?
And knowing that bank capital is to be there to cover for unexpected losses, then the last thing I would do would be to base the capital requirements on some expected losses… especially when we know that the safer something is perceived the larger its potential to deliver some truly nasty unexpected losses. Would you not agree with that GARP?
And, if I was a bank regulator, managing risks, the first thing I would do is to be certain about the purpose of banks. That would indicate me that probably the risk we least can afford banks to take, is that of not allocating bank credit efficiently to the real economy. And that is something that becomes impossible when allowing banks to leverage differently with different assets, and thereby earning different and not market based expected risk adjusted returns on equity. Would you not agree with that GARP?
Right now the world is becoming a sad place, especially for coming generations, since regulators having given banks the incentives to stop financing the riskier future, and to make their profits by concentrating on refinancing the safer past.
GARP do you not have a responsibility is speaking up against the Basel Committee’s and the Financial Stability Board’s particularly harmful and lousy way of managing risks?
I ask because your stated mission is: “As the leading professional association for risk managers, the Global Association of Risk Professional's mission is to advance the risk profession through education, training, and the promotion of best practices globally.”
And also because in “What we do” you state: “GARP enables the risk community to make better informed risk decisions through “creating a culture of risk awareness®”. We do this by educating and informing at all levels, from those beginning their careers in risk, to those leading risk programs at the largest financial institutions across the globe, as well as, the regulators that govern them.”
Saturday, January 30, 2016
Regulators have imposed credit risk weighted capital requirements for banks… more perceived risk, more capital – less perceived risk, less capital.
That allow banks to leverage more their equity and the support they receive from society like for instance deposit insurance guarantees when lending to The Safe than when lending to The Risky.
That means banks earn higher expected risk adjusted returns on equity when lending to The Safe than when lending to The Risky.
And so banks will lend more and on easier terms to The Safe, and less and on relatively harsher terms to The Risky.
And too much lending in too easy terms against too little capital to what is ex ante perceived as safe, but that ex post can turn out risky, is precisely the stuff major bank crises are made of.
And too little lending and on too harsh relative terms to what is ex ante perceived as risky, like to SMEs and entrepreneurs, is precisely the stuff that hinders sturdy economic growth.
Banks no longer finance the riskier future they only refinance the safer past... and our young are going to pay dearly for it.
Friday, January 29, 2016
“delta, vega and curvature risk” Basel Committee’s member understand less and less what they are doing, by the minute
To read the Basel Committee’s “Minimum capital requirements for market risk” of January 2016 is truly mindboggling. Do yourself a favor and just look at the index.
Do those really responsible for what is coming out of the Basel Committee truly understand what is said there?
I am sure that John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”, applies to most of them.
And it is not like the Basel Committee has shown itself to be a good regulatory body. It has actually been one of the most failed ones… so failed that they should have been prohibited from having anything to do with bank regulations… forever.
Do you really think its current Chair, Stefan Ingves, could provide you with a lucid explanation of it?
I know enough about finance to know when our banks are being dug even deeper in the hole in which they should not be.
The regulators wrote that the bank capital requirements are portfolio invariant because … otherwise it “would have been a too complex task for most banks and supervisors alike”... and now they come with "delta, vega and curvature risk"?
Credit ratings do not reflect timely possible severe drops in commodity prices or volatile monetary policies
What is happening with commodities, like oil, and with emerging countries should open the eyes of bank regulators… but probably it won’t.
Our bank nannies based their requirements of that capital that is to cover for unexpected losses on what they perceived as the one and only risk, namely the ex ante perceived expected credit risk… in much as it was reflected in the credit ratings.
And the credit rating agencies rate the companies based on what they currently see.
Where did the credit ratings reflect the possibility of a dramatic drop in the price of oil before it happened? Nowhere!
Where do credit ratings consider the consequences, like for emerging markets, of shocking volatile monetary policies before they hit the market? Nowhere!
And so now there is a lot of downgrading going on, and as a result lots of new capital is being required of banks, something that only accentuates the general downturn.
The truth is that banks should already have had the capital to cover for unexpected losses, when they placed the assets on their balance sheets.
Thursday, January 28, 2016
I refer to:
Attack of American Free Enterprise System
Date: August 23, 1971
To: Mr. Eugene B. Sydnor, Jr., Chairman, Education Committee, U.S. Chamber of Commerce
From: Lewis F. Powell, Jr.
It mentions "The Ideological War Against Western Society"
And I have a question for you all.
In 1988, by means of the Basel Accord, Basel I, for the purpose of setting the risk weights applicable to the credit risk weighted capital requirements for banks, the regulators defined a zero percent risk weight for the OECD sovereigns (governments) and a 100 percent risk weight for the citizen (the private sector)
That meant that governments would have more favorable access to bank credit than the citizens; which de facto implied that government bureaucrats use bank credit more efficiently than citizens.
There were protests from other sovereigns who also wanted to be awarded a zero percent risk weight… but how come no American citizens protested this in your face statist regulation?
Is not the strength of a sovereign solely the reflection of the strength of its citizens?
That distortion subsidizes government debt; with the subsidy paid for all those in the private sector who as a consequence will, in relative terms, have less and more expensive access to bank credit?
Is this of no interest to America?
If so then America is not what I had learned to believe and admire.
Monday, January 25, 2016
The role of journalists is to be curious. So why aren’t those who cover bank regulations? Are they scared?
Even though credit risks were already cleared for banks by means of interest rates and size of exposures, regulators introduced in the 1980s risk weighted capital requirements for banks. These indicated banks needed to hold more capital against assets perceived as risky than against assets perceived as safe. That allowed banks to leverage more with assets perceived as safe than with assets perceived as risky resulting in that banks earned higher expected risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky.
Where not regulators aware of that this introduced serious distortions in the allocation of bank credit to the real economy? And if so, who authorized them to do such a thing?
In Basel I, for the purpose of calculating the risk weighted capital requirements for banks the risk-weight of the sovereigns was set at zero percent while the risk-weight of the private sector that provides the sovereign its strength was set at 100 percent.
How come? Would this not mean that the access of sovereigns to bank credit would be subsidized by the private sector's loss of access?
In 2004 Basel II set the risk in the private sector at 20 percent for what was rated ‘prime’ AAA to AA; 100 percent for what was unrated, and 150 percent for what was rated ‘highly speculative’ below BB- rated.
This meant that bank regulators considered ‘highly speculative’ below BB- rated to be much more dangerous to banks and the bank system than ‘prime’ AAA to AA rated.
How could expert regulators believe such a thing?
Bank capital is to cover for unexpected losses, and that the regulators acknowledge.
How then could regulators believe they could use ex-ante perceived expected credit losses to generate an estimate for the unexpected? And to top it up, by definition the safer something is perceived, the larger its potential to cause unexpected losses. And if so should not the capital requirements be 180 degrees in the opposite direction, higher for what is perceived as safe than for what is perceived as risky?
And there are many more questions on this issue a curious reporter should be able to make… but they don’t ask… why? Are they scared for something?
Thursday, January 21, 2016
I refer to Wall Street’s World Economic Forum “Outlook 2016”, January 20, 2016.
Like for instance when Lingling Wei and John Hilsenrath write “Global Economy Loses Steam” The Wall Street Journal, January 20, 2016.
How on earth could not the Global Economy lose steam with regulators who, in an effort to make banks safer, have decided banks should be allowed to earn much higher risk adjusted returns on equity when lending to what is ex ante perceived or deemed to be safe, like to “infallible sovereigns”, AAArisktocracy or housing, than when lending to “risky” SMEs and entrepreneurs. That is the direct result of the risk weighted capital requirements.
“The future is here. It just needs a big push”, writes Christopher Mims. Indeed but why not start by removing the hurdles? As is, with this regulatory credit risk aversion, banks are no longer financing the riskier future they are only refinancing the safer past.
And all that distortion for no good reason, since major bank crisis never result from excessive exposures to something ex ante perceived as risky, but always from too big exposure to what has turned out to be erroneously perceived as safe.
What a shame that, with so many good journalists present in Davos, no one makes THE QUESTION
PS. Another version of THE QUESTION
Tuesday, January 19, 2016
If banks are allowed to hold less capital against mortgages than against loans to SMEs and entrepreneurs… something that they are allowed now.
Then banks can leverage their equity, and the support they receive from society, by for instance deposit insurance schemes, much more with mortgages than with loans to SMEs and entrepreneurs.
And then banks will earn higher ex ante perceived risk adjusted returns on equity when lending to those buying houses than when lending to those who can generate the next generation of jobs.
And then banks will lend more to home buying than to job creation.
And then the citizens are doomed to end up sitting in expensive houses, with low salary jobs or no jobs at all to pay their utilities and their mortgages with.
Is this really what you want?
Thursday, January 14, 2016
How could a crisis resulting from statist interventions, morph into a backlash against banks, capitalism and markets?
1988 with the Basel Accord, Basel I, the regulators, for the purpose of determining the capital requirements for banks, set the risk weight of the Sovereign (the government) to be zero percent while that of the private sector was set at 100 percent. Have you ever seen something more statist than that?
And in 2004, with Basel II, regulators within the private sector, assigned risk weights that ranged from 20 to 150 percent.
Those risk weights translated into banks needing to hold much less capital (mostly equity) against the Sovereign and the Safe Privates (the AAArisktocracy and houses) than against the Risky Privates (SMEs and entrepreneurs).
That meant banks could leverage their equity much more with Sovereign and Safe Privates, than with Risky Privates.
And that meant banks could obtain much higher risk-adjusted returns on equity with Sovereign and Safe Privates, than with Risky Privates… have you ever heard of something that distorts the allocation of bank credit more than that?
And of course the world ended up with a typical bank crisis, one of those that always result from excessive exposures to something ex ante perceived (or deemed) as safe (AAA-rated securities – Greece), but in this case made so much worse by the banks having been allowed to hold especially little capital against “The Infallible”.
But yet this utterly faulty regulation has been framed in terms of “de-regulation”, which has placed the full blame for the crisis on banks, free markets and capitalism.
How did that happened… who are the responsible for that?
A question: Basel II required banks to hold 1.6 percent in capital against what is AAA rated and 12 percent against the below BB- rated. What do you think poses greater danger to the stability of the banking sector: what’s AAA or what’s below BB-?
Bank capital is to help cover for unexpected losses.
The safer something is perceived the greater the potential of unexpected losses.
No bank crisis ever has resulted from excessive exposures to something ex ante perceived as risky.
Current capital requirements for banks are much lower for what is perceived as risky than for what is perceived as safe.
So the current capital requirements for banks seem to be 180 degrees wrong... could that be?
Wednesday, January 13, 2016
Banks regulators believe what’s rated AAA, is more dangerous to the banking system than what’s rated below BB-… Really?
Bank regulators, when trying to make our banks safe, decided that the risk weight for AAA rated assets, a rating described as “prime”, was to be 20%. That, since the basic capital requirement in Basel II was 8 percent, meant that banks needed to hold 1.6 percent in capital (equity) against those assets; and could leverage their equity 62.5 times to 1 with these assets.
For assets rated below BB_ though, ratings described as moving from “highly speculative”, through “extremely speculative” and up to “default imminent”, the risk weight was set at 150 percent. And that, with Basel II’s basic 8 percent, meant that banks needed to hold 12 percent in capital against such assets, and which allowed banks to only leverage about 8.4 times to 1.
But let me ask all of you. What do you think can create those kind of excessive exposures that could endanger the stability of our banking system; exposures to what ex ante was thought to be AAA but that ex post surprised banks by being very risky, or exposures to what was rated below BB- and actually turned out to be very risky?
I hear you… so what did we do to deserve such bad bank regulators?
Tuesday, January 12, 2016
Optimism? No! Use of credit risk weighted capital requirements for banks reflects a severe pessimism about the future
Had banks not held excessive financial exposures related to AAA rated securities backed with mortgages to the subprime sector, or to loans to sovereigns like Greece, the greatest bank crisis of our times would not have happened… and there can be no doubt about that.
Those excessive financial exposures, to assets that were ex ante perceived or deemed as safe, should have been an expected consequence of allowing banks to earn much much higher risk adjusted returns on equity on these assets, than what they could earn for instance on “risky” loans to SMEs and entrepreneurs.
That resulted from regulators allowing banks to hold much much less capital (equity) against “The Safe” than against “The Risky”; by which banks could leverage their equity many many times more with supposedly safe assets than with supposedly risky ones.
And the cost of the greatest bank crisis of our times is still underestimated and is still growing, because it does not include the cost of all those growth opportunities the world, as a consequence, missed and misses by not lending to “risky” SMEs and entrepreneurs.
Favoring with regulations what’s safe over what’s risky, something that also promotes inequality can only be the result of a deeply ingrained risk adverse pessimism. Therefore, while these faulty regulations are still in place, referring to a feeling of optimism about the future is a contradiction in terms.
The economy is, by going for the “safe” carbohydrates, growing obese. A muscular growth requires the intake of “risky” proteins.
Banks are no longer financing the riskier future they are just refinancing the safer past.
How come the Home of the Brave (and Europe) that became what it is because of its willingness to take risks, has accepted this senseless regulatory risk aversion?
Bank capital should cover unexpected losses but what is perceived as safe, has always a greater potential of delivering these than what is perceived as risky and therefore avoided.
How come those most guilty for the greatest bank crisis of our times have not been named, much less held accountable?
Monday, January 11, 2016
The Basel Committee for Banking Supervision introduced credit risk weighted capital (equity) requirements for banks: more risk more capital – less risk less capital.
That allowed banks to leverage their equity much more when lending to that perceived or deemed safe, like to the AAArisktocracy or Infallible Sovereigns, than when lending to those perceived risky, like SMEs and entrepreneurs.
That allowed banks to earn much higher risk-adjusted returns on equity when lending to the safe than when lending to the risky… sort of realizing bankers' wet dreams.
And that means banks build up dangerous excessive financial exposures to what is perceived as safe, against very little capital, precisely the stuff major bank crises are made off.
And that means banks will mostly refinance the safer past than finance the riskier future, negating thereby the young the opportunities their elder benefitted from in the past.
And, in a nutshell, that guarantees growing inequalities and weakening economies.
Damn the Basel Committee, their associates and all other who maintain interested silence on this de facto regulatory crime against humanity, that I sincerely believe was committed unwittingly.
Where did this disaster, which could even be defined as an unwitting economic crime against humanity, originate? There are many factors, and here are some of those I feel are most relevant.
Regulators never defined the purpose of the banks and, if you regulate without doing that, then anything could happen.
Regulators though knowing that banks capital is to be there to help cover for unexpected losses, got confused and used the expected credit risks to estimate the unexpected.
Regulators simply ignored that what is perceived as safe has by definition a greater potential to deliver unexpected losses than what is perceived as risky.
Regulators concerned themselves with the perceived risks of bank assets, instead of with the risk of how bankers would manage those perceived risks.
Regulators simply did not do some empirical research on what causes major bank crises and where therefore not able to manage the differences between ex ante perceptions and ex post realities
Etc. etc. etc.
Shame on the Basel Committee, their associates and all other who keep mum on this.
Saturday, January 9, 2016
How come Nobel Prize winning economists do not understand how regulators distort the allocation of bank credit?
Capital is invested in banks by shareholders looking to obtain the best risk adjusted returns on their equity.
Before current regulators concocted the credit risk weighted capital requirements for banks, the banks, without any sort of discriminations, gave credit to whoever offered them the highest risk adjusted margins.
But now, because of those requirements, more credit risk more capital – less risk less capital, banks can leverage their equity much more with what is perceived as safe than with what is perceived as risky; and can thereby earn much higher risk adjusted returns on equity when lending to the perceived safe than when lending to what is perceived as risky.
And of course, favoring the AAA rated and sovereigns, negates the fair access to bank credit to those perceived as risky, like SMEs and entrepreneurs, and so helps to weaken the economies and to increase the existing inequalities.
Just look at this: Basel II of June 2004 set the risk weight for AAA rated at 20 percent and allowed banks to leverage their equity over 60 times. But for unrated corporations the risk weight was set at 100 percent and in this case banks could only leverage about 12 times.
And all distortion for nothing, since absolutely all major bank crisis result from excessive exposures to something that ex ante was perceived as safe but that ex post turned out to be very risky.
But you read the comments on the 2007-08 crises by Nobel Prize winning research economists, like those of Joseph Stiglitz and Paul Krugman, and it is clear they have no idea about how the regulatory incentives distorted the allocation of bank credit. Unless they shut up for other reasons, like ideological ones, it would seem clear they never had the benefits of a decent Econ 101.
As for me, I strongly feel the Nobel Prize Committee, when the winners use the Nobel Prize reputation to opine in areas totally strange to them, should have the right to revoke Nobel Prizes, and ask for the prize money to be repaid.