Sunday, November 8, 2015

#BoEOpenForum: What a great opportunity to make questions that have bothered me for over a decade, but which are never responded

The Bank of England announced: “Send your thoughts and ideas by email to: We will publish as much of this material as we can.”

And so I did, and they replied: “Thank you for your e-mail regarding the Open Forum on Building Real Markets for the Good of the People. We welcome your interest in the event, which is due to take place on 11 November 2015 at the Guildhall, London.”

Below is what I sent… have you seen any answer?

Bank of England, how can you justify the pillar of current bank regulations that have emanated under the Basel Accord, the credit-risk weighted capital requirements for banks? More ex ante perceived credit risk, more capital (meaning mostly equity) – less risk, less capital.

1. Banks already consider credit risks when setting risk premiums and deciding on the size of their exposures. And so, considering that same credit risk again, when setting the capital requirements, causes credit risks to be excessively considered. Don’t we all know that any risk perfectly perceived results in the wrong actions, if excessively considered?

2. Why do regulators concern themselves with the risk of banks’ assets when they should really be concerned with how the banks manage those risks? Motorcycles are indeed riskier than cars, but many more die in car than in motorcycle accidents.

3. This regulation allows banks to leverage more with what is perceived as safe than with what is perceived as risky; meaning that banks will be able to earn higher expected risk adjusted returns on equity when lending to what is safe than when lending to what is perceived as risky; resulting in that banks will lend too much to what is perceived as safe, and too little to what is perceived as risky… like to SMEs and entrepreneurs.

4. And this means in essence that banks will be prone to stay away from financing the riskier future, and keep to refinancing the safer past. How come regulators did not define the purpose of banks, like allocating credit efficiently to the economy before settling for these capital requirements? Is being a safe mattress in which to stack away or savings, the reason why society supports the banks? That does not sound right. If regulators cannot resist the temptations to distort, why not do so based on the SDGs?

5. Besides, if capital requirements are primarily to serve as a buffer against unexpected losses, something regulators have explicitly accepted, how on earth can one justify these to be based on expected credit losses? Is it not really so that the safer something is perceived, the greatest is its potential to deliver unexpected shocks?

6. And all that credit risk aversion for what? Is it not so that no major bank crisis ever, has resulted from excessive financial exposure to assets perceived as risky when booked? Have these not always resulted from excessive financial exposures to what was wrongly considered as very safe assets when booked? What empirical data gathering about the ex post causes of bank failures and bank crises did bank regulators do, before settling for these capital requirements that are based solely on ex ante perceived credit risks?

7. And those capital requirements have seeded all type of confusion in the market. That can clearly be evidenced with the number of time specialized media, and even financial officer of high status, have made historical comparisons between the non-risk weighted capital of banks in the past and this modern credit risk-weighted concoction. Do you really think risk-weighted capital requirements allow for any sort of reasonable comparison between banks?

8. And why do you accept the increasing complexity that, with the exceptions of those who make a living out of it, serve no one well? From about 30 pages in Basel I to what there is now. And add to that massive local regulatory documentation. And how come you can sit back and not scream when subject to intellectual waterboarding, by for instance the European Commission’s decreeing “a supporting factor equal to 0,7619 to allow credit institutions to increase lending to SMEs.”?

9. Besides, the regulators set the risk weight for sovereigns much lower than for any other borrowers…. zero percent sovereigns -100 percent private sector! Some could justify that arguing that sovereigns can print money and are therefore always able to repay. But does that not ignore that sovereigns quite often end up repaying with printed money worth much less; or requiring extra taxpayer assistance. And does not that, which makes it easier for governments to borrow, imply regulators believe government bureaucrats can use bank credit more efficiently than the private sector? Are current bank regulators allowed to act as statist activists?

10. And with the above referenced regulatory favoring of that sovereign debt that is usually used as reference for the risk free rate, do we now not have a subsidized free rate that is impossible to interpret?

11. We are here thanks to the risk-taking of generations before us. Are we morally allowed to accept risk adverse regulations that negates next coming generations the risk-taking they deserve and need? Does that not break that holy intergenerational bond Edmund Burke spoke about? God make us daring!

12. And odiously discriminating in favor of The Safe, and therefore against The Risky, and thereby negating many the opportunities of betterment, is that not the surest way to increase inequalities?

13. Leverage ratios that do not depend on credit risk, are now being imposed on banks; and this undoubtedly creates extra capital scarcity. Just like when crossing a desert you sacrifice those who most consume scarce water reserves that makes on the margin the credit risk weights even more distortionary. Do regulators ignore how pro-cyclical these regulations are?

14. Though I have many other similar observations, let me just finalize here by asking: Why is it that a person like me, who has more than enough professional and academic background to be making these questions, who has proven like very few having alerted to the dangers of current bank regulations, even while being an Executive Director of the World Bank (2002-04); who has formulated thousands of questions on this issue during more than a decade, in all type of venues, has not been able to receive any sort of clear answers?

Friends, in 1999 in an Op-Ed 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 its collapse”. We have already experienced one AAA-bomb exploding, but our regulators keep taking us down that same crazy road. BoE could you please help us stop them?

Yours truly,

Per Kurowski

PS. Mark Twain has been attributed with saying that the bankers are those who want to lend you the umbrella when the sun shines and want to take it away when it is raining. Dear BoE, what is to be gained by making bankers want to lend you the umbrella even more when the sun shines, and take it away even more when it looks like it is going to rain?

PS. If you need references of me here is what I can document having written early:

And since then you can find my many thousands comments in: