De riskvägda bankkapitalkraven borde åtminstone ha baserats på betingade sannolikheter. Det var de/är de inte.

Här några tweets om P (A / B)

I sannolikhetsteori är betingat sannolikhet sannolikheten för att en händelse (A) inträffar (som att banker lånar för mycket till någon säker), med tanke på att en annan händelse (B) har inträffat (att bankirerna hade uppfattat denne någon som mycket säker).

I sannolikhetsteori är betingat sannolikhet sannolikheten för att en händelse (A) inträffar (som att  banker lånar för mycket till någon riskabel), med tanke på att en annan händelse (B) har inträffat (att bankirerna hade uppfattat denne någon som mycket riskabel).

Ingen tillsynsmyndighet som vet något om betingad sannolikhet skulle aldrig ha tilldelat, med tanke på riskvägda bankkapitalkrav, en låg riskvikt på bara 20% till de bedömda som mycket säkra AAA, och en hög 150% till de bedömda som mycket riskabla lägre än BB-

PS. En fråga till Herr Stefan Yngves 2015

PS. Mitt brev till Financial Stability Board

Paul Krugman there's huge Excel type data mistake that is bringing the Western economies down into deep depression

Ref: http://economistsview.typepad.com/economistsview/2013/04/paul-krugman-the-excel-depression.html

The regulators of the Basel Committee for Banking Supervision, when designing their risk weighted capital requirements for banks made the outrageous mistake of looking at the specific risks of banks assets, and not at the risk of those assets to the banks, or to the bank system.

That is why they came to assign a whopping 150% risk weight to what is rated below BB-, something so risky that bankers wont even touch it with a ten feet pole; while only a minuscule risk weight of 20% to what is rated AAA and that because of its perceived safety, could cause banks to create such exposures that if ex post the asset turn out riskier, these could bring the whole system down.

That makes banks dangerously lend too much to what is perceived safe and for the economy equally dangerous too little to what is perceived as risky, like SMEs and entrepreneurs. 

The Western world has thrived on risk-taking not risk aversion.

PS. The 0% risk weighing of sovereigns is just as mind-boggling.

A challenge: Can you spot the lunacy in the Basel Committee’s risk weighted capital requirements for banks?

These are the facts established by Basel II in 2004.

1. Very safe AAA to AA rated = 20% risk weight = 1.6% capital requirement = 62.5 times to 1 allowed leverage.

2. Very risky below BB- rated = 150% risk weight = 12% capital requirement = 8.3 times to 1 allowed leverage.

So what’s crazy with that?

Let me give you a clue! 

What can create those kinds of excessive bank exposures that could bring down a bank system?

A safer banking system compared to our current dangerously misregulated one with so many systemic risks on steroids

What is a safer banking system?

One in which thousand banks compete and those not able to do so fail as fast as possible, before some major damage has been done, while even, as John Kenneth Galbraith explained, often leaving something good in their wake. 

What is a dangerous banking system?

One were all banks are explicitly or implicitly supported, by taxpayers, as long as they follow one standard mode that includes living wills, stress tests, risk models, credit ratings, standardized risk weights... all potential sources of dangerous systemic risks.

A bank system in which whenever there is a major problem, the can gets kicked down the road with QEs and there is no cleaning up, and banks just get bigger and bigger.

One that make it more plausible that the banks will all come crashing down on us, at the same time, with excessive exposures to something ex ante perceived safe that ex-post turned out risky, and therefore the banks holding especially little capital.

But you don’t worry; the regulators have it all under control with their Dodd-Frank’s Orderly Liquidation Authority (OLA). “Orderly”? Really?

So that is why when I hear about banks “cheating” with their risk models I am not too upset, since that at least introduces some diversity. 

Also that cheating stops, at least for a while, the Basel Committee regulators from imposing their loony standardized risk weights of 20% for what has an AAA rating, and so therefore could be utterly dangerous to the system; and one of 150% for the innocuous below BB- rated that bankers don’t like to touch with a ten feet pole.

How did we end up here? That is where you are bound to end up if you allow some statist technocrats, full of hubris, to gather in a mutual admiration club, and there engage into some intellectually degenerating incestuous groupthink.

Statist? What would you otherwise call those who assign a 0% risk weight to the Sovereign and one of 100% to the citizen?

And it is all so purposeless and useless!

Purposeless? “A ship in harbor is safe, but that is not what ships are for”, John A Shedd

Useless? “May God defend me from my friends, I can defend myself from my enemies”, Voltaire

In essence it means that while waiting for all banks to succumb because of lack of oxygen in the last overpopulated safe-haven available, banks will no longer finance the "riskier" future our grandchildren need is financed, but only refinance the "safer" present and past.

In April 2003, as an Executive Director of the World Bank I argued: "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."

PS. FDIC... please don't go there!

Note: For your info, before 1988, we had about 600 years of banking without risk weighted capital requirements for banks distorting the allocation of bank credit to the real economy.

PS. The best of the Financial Choice Act is a not distorting, not systemic risks creating, 10% capital requirement for all assets. Its worst? That this is not applied to all banks.

PS. If I were a regulator: Bank capital requirements = 3% for bankers' ineptitude + 7% for unexpected events = 10% on all assets = Financial Choice Act
 

Here is one mystery in current bank regulations that regulators refuse to reveal to us.

That which has an AAA rating, meaning it is perceived as very safe, will of course have much access to bank credit, and be required to pay very low risk premiums. If those ratings then turn out to be wrong, sometimes precisely because since it was considered very safe too much credit was given to it, individual banks, and the bank system, face a very serious problem.

That which has a below a BB- rating, meaning it is perceived as extremely risky, has access to much less credit and, when it gets it, will be by paying much higher risk premiums. If those ratings turn out to be even worse, some individual bank might have a smaller problem, but the bank system as such, would face no problems at all.

But, an here is the mystery, bank regulators, with their Basel II, in June 2004, for the purpose of setting the capital requirements for banks, set a 20% risk weight for the AAA rated and 150% for what is below BB-.

Why so? If "safe" could be dangerous and "risky" is innocuous, could it not really be the other way around?

And that, since regulators refuse to explain it, is now, soon 13 years later, still a mystery to us

PS. Questions regulators refuse to answer