Wednesday, October 21, 2015

What if super duper scientists of Koshland Science Museum helped me to call out bank regulators’ monstrous mistake?

I was walking by the Koshland Science Museum in Washington, when I saw some windows that shouted out to me…maybe some real scientists can help me out fighting bank regulations, those which in my opinion are destroying our economies and the job opportunities of our young. Though I have objected in a thousand ways the regulators just do not want to answer. If they are too embarrassed about their mistake, I understand them perfectly well. But, for a mistake to be corrected, it needs first to be acknowledged.


CAUSE: The pillar of current bank regulations is the credit risk weighted capital requirements for banks. More perceived credit risk – less perceived credit risk. These give banks much larger incentives to finance what is perceived as safe than what is perceived as risky.

EFFECT: Banks dangerously overpopulate the safe havens and, equally dangerous underexplore the more risky bays where SMEs and entrepreneurs live. 


FACT: Banks already consider perceived risk when setting interest rates and amounts of exposures, so that also make them consider the same perceived credit risks, in the capital assigns double importance to credit risks.

FICTION: Major bank crisis occur because of excessive exposure to what ex ante is perceived as risky. The truth is that all major bank crises occur because of excessive exposure to assets ex ante perceived as safe, but that ex-post turned out to be risky.


RISK: Though banks might not always be able to manage the perceived risks correctly, or the perceptions might be wrong, we must risk allowing banks to allocate credit to the real economy without any regulatory distortion.

BENEFIT:  Risk taking, reasoned audacity, is the oxygen of all development. That is what brought us here, and that is what we must allow, in order for our economies not to stall and fall, in order to give our children and grandchildren the same opportunities we were given. 


ACTION: To enlist Koshland Science Museum and all its affiliated scientists’ support in forcing regulators to explain themselves; and also express their opinion on Kurowski’s bank risk management rules:

1. Any risk, even if perfectly perceived, leads to wrong decisions, if excessively considered.

2. Capital requirement should cover unexpected losses, not expected credit losses; and the safer an asset is perceived, the larger it’s potential to deliver unexpected losses.

REACTION: Hopefully to make bank regulators wake up and rethink all their strategy; starting with defining the purpose of banks, something that, amazingly, they never did before regulating the banks.

If only regulators had set their capital requirements to be risk-weighted for banks’ management of perceived credit risks. As is we are better of with capital requirements for banks based on regulators not knowing what they are doing. For that, let us have 8-10% capital on all bank assets!

PS. But be very careful how you go from here to there... the journey has its dangers.

PS. I see you are interested in sustainability. What if banks earned higher risk adjusted returns on equity when helping out with that?