Ms. Elizabeth Warren, the banking system is rigged; foremost in favor of the State and banks, and against the young.

Senator Elizabeth Warren, in remarks given to AFL-CIO council on November 10, while trying to explain what lay behind the election of Donald Trump as president said: “Working families across this country are deeply frustrated about an economy and a government that doesn’t work for them. Exit polling on Tuesday found that 72 percent of voters believe that, quote, ‘the American economy is rigged to advantage the rich and powerful.’ The polls also made clear that the economy was the top issue on voters’ minds. Americans are angry with a federal government that works for the rich and powerful and that leaves everyone else in the dirt.”

Yes, the American economy is rigged, but at least with respect to the bank system, not exactly in the way most believe it is. I explain.

For the purposes of setting the capital requirements for banks, regulators, the Basel Committee, have decided, among others, on the following risk weights:

The sovereign (the central government and its bureaucrats) = 0%

Those rated AAA to AA (the AAArisktocracy) = 20%

Houses = 35%

The not rated, like citizen’s and SMEs = 100%

Those rated as extremely risky, like below BB-, = 150%

A lower risk weight results in having to hold less capital (equity); 

That means bank can leverage their equity more; 

That results in banks earning higher risk adjusted returns on equity; 

That therefore means banks will lend much more to what has a low capital requirements; 

In this case that means banks will lend much more than they would otherwise have done, to what is perceived, decreed or concocted as safe; and much less than the would otherwise have done to what is ex ante perceived as risky.

And so Yes! The banking system is rigged.

First and foremost, rigged in favor of the State; suggesting that when government bureaucrats use bank credit they do so much more efficiently, and generate much less risk, than if similar credit is used by the private sector/We the People.

Then rigged in favour of the banks; because being allowed to make the highest risk adjusted returns on equity on what is perceived as safe, must be a dream come true for all those bankers, described by Mark Twain, as wanting to lend you the umbrella when the sun was out, and wanting it back as soon it looked it could rain

Rigged in favor of the AAArisktocracy; by believing that a few human fallible credit rating agencies will always get it right, and that credit ratings, based on an ex ante very low risk perception, guarantees a very low ex post risk.

Rigged in favour of those buying houses, for instance basements were unemployed youth can live with their parents.

It is rigged against We the (risky) People

It is rigged against SMEs and entrepreneurs; negating the “risky” credit opportunities, it is a major driver of inequality.

It is foremost rigged against the young; because it makes banks refinance more their parents “safer” past and present, than their “riskier” future.

And all that risk aversion... in the Home of the Brave. America would never ever have become what it is, with this senseless bank regulation. Risk-taking is the oxygen of all development. 

God make us daring!

Let us tell the story of the Basel Committee’s risk weighted capital requirements for banks this way:

This happened during a meeting in the Basel Committee for Banking Supervision

Q. Colleagues, how on earth can we stop banks from failing? 

A. Well they must avoid taking risks?

Q. Absolutely! But how do we stop them from taking risks?

A. Perhaps by giving them great incentives to make their profits where it is safe?

Q. Sounds great! Any idea how?

A. Well we could allow them to leverage much more when lending to what is safe than when lending to what is risky.

Q. How would that help?

A. Well then the banks could obtain higher risk adjusted rates of return on lending to what is safe than on lending to what is risky.

Q. But, could that not distort the allocation of credit to the real economy?

A. Oh that is not our problem. We are just here to make banks safe. 

Q. But, what if something perceived as safe turns out to be risky?

A. Don’t be so negative. We will deal with that later if it ever happens.

Q. But could not someone argue we are introducing a regulatory discrimination against The Risky?

A. Who cares? The sovereign will be more than happy if we give it a zero percent risk weighting. The banks, making their best profits on what is safe, will only have their wettest wet dreams realized. And the risky, the SMEs and entrepreneurs, they have no voice… hey they are not even invited to the World Economic Forum at Davos… there we only meet the AAArisktocracy.

Q. Dear colleague, you have convinced all of us… let us go for it. By the way, what is your name?

A. Chauncey Gardiner Sir

Houston we’ve got a huge problem. Bank regulators and other experts don’t get it!

With Basel II, banks were authorized to leverage their defined equity:

Unlimited times when lending to AAA to AA rated sovereigns
62.5 times to 1 when lending to the AAA to AA corporates, the AAArisktocracy
35.7 times to 1 when financing residential housing
And only 12.5 times to 1 when lending to unrated citizens SMEs and entrepreneurs

And that of course allowed banks to earn quite different expected risk adjusted returns on equity not based on what the market offered, but based on what the regulators dictated.

And regulators, finance professors, FT editors and journalists, and many other experts simply do not understand that this distorts the allocation of bank credit to the real economy.

What are we to do?

The Basel Committee’s besserwissers, on top of the ordinary defenses of banks, built a dangerous Maginot Line,

When banks use ex ante perceived credit risks (EAPCRs) to determine the interest rates (risk premiums) the amounts and other contractual terms of their exposures… all these their defenses, it might still at the end of the day, at least for some individual banks, end up like a totally useless Maginot Line.

But, when regulators decide to base their capital requirements for banks on precisely the same EAPCRs, then they are, de facto, on top of the defenses built by the bankers, building an extremely dangerous Maginot Line that could bring the whole banking system down.

That is because giving 200% weight to the EAPCRs will mean that “The Safe” be perceived as safer than what the EAPCRs validate, and “The Risky” will be perceived as riskier than the EACPRs validate. And the banking system will therefore lend too much to The Safe ("infallible sovereigns" and AAArisktocracy) and too little to The Risky (SMEs and entrepreneurs.

God make us daring!

God save us from hubristic besserwisser regulators’ mumbo jumbo scheming!

The only moment when we currently could deem our banks to be safe, and the credit allocation to the real economy is not distorted, is when the EAPCRs are adequately wrong. Meaning The Safe are in reality safer than perceived; and The Risky are in reality riskier than perceived… What a crazy world!

PS. May I humbly remind you of The Per Kurowski’s Rule?

The world’s banking system has been instructed by its regulator to give perceived credit risk a 200% weighting.

With bankers using perceived credit risk to set their interest rates and amount of exposures; and regulators using the same perceived credit risk to set their capital requirements for banks; it is clear that perceived credit risks get a 200% weighting. 

Any banking system that becomes 200% sensitive to perceived credit risks, dooms itself to lend dangerously much to The Safe, the Infallible Sovereigns and the AAArisktocracy; and way too little to The Risky, like to SMEs and entrepreneurs; which is of course fatal for the real economy and therefore also to the banks.

What would have happened if Winston Churchill, when confronted with the dangers had said: "In order to avoid our houses being bombed, we need to become 200% sensitive to risk."

This whole blog is dedicated to explaining how fatally flawed current Basel Committee originated bank regulations are. Here is a recent public letter to its current chair Mr. Stefan Ingves.

Pension funds, widows and orphans have been told to keep out of what’s perceived safe, that’s now the banks’ domain

Bank regulators, with their credit-risk-weighted capital requirements, allow banks to leverage their equity and the support received by deposit guarantees and similar, immensely, as long as they stick to lending to “The Safe”... in their mind the infallible sovereigns, the AAArisktocracy and housing.

Consequentially the more regulators favor and therefore subsidize bank lending to “The Safe”, the lower will be the interest rates paid by “The Safe”... sometimes even down to zero interests, and, of course, in relative terms the higher the rates “The Risky” need to pay. 

Ergo… non-banks who have to evaluate the increased spreads between The Safe and The Risky, without counting with the regulatory bank-subsidies, are more tempted by, or are in more need of the higher rates paid by The Risky.

Pension funds, widows and orphans who were the one investing in “The Safe”, have now been told to get out of there… “That’s for the banks!”

"The Risky", like the SMEs and the entrepreneurs they used to have access to the banks… now they are left out in the cold… desperately looking for some crowd-funding.

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.

An indebted unemployed student’s story:

An indebted unemployed student: "At last I thought I had a reasonably good paying job that would make me be able to repay my student debt, and earn me something on top of that, for all the time and efforts I had invested in my studies. But, that was not to be, because the owner of the SME who was offering me the job, had his credit application denied by the local bank that had the most intimate knowledge of his business and plans. Much saddened, even despaired, I asked the employer I had counted on… How come?”

SME owner: “The banker told me that if he gave me the loan then, because I was officially perceived as risky from a credit risk point of view, regulators required him to hold much more equity than if he lent that money to an AA rated corporation or invested it in treasury bills. And, unfortunately, he did not have that equity.”

Indebted unemployed student: “What? In the home of the brave, banks are required to hold more equity against loans to the supposedly risky than against loans to the supposedly safe?” 

SME owner: “Yes, ever since the US signed up on the principles of the Basel Accord back in 1988, and especially after the approval of Basel II in 2004, that is how it is. Sorry my dear unemployed student loan debtor, there’s nothing I can do about it! I am just as sad and hurt.”

Indebted unemployed student: “But why would the regulators do a thing like that?”

SME owner: “Beats me. As far as I know all real big bank crises have never ever resulted from excessive loans to “risky” SMEs and entrepreneurs like me, these have always resulted from excessive bank exposures to what banks, and regulators, believed to be absolutely safe, but turn out not to be.”

Indebted unemployed student: “But that’s plain crazy!”

SME owner: “Indeed, it is an odious discrimination, and by killing opportunities it promotes inequality.  But, no one dares to question the regulators, especially when it has become so fashionable to question bankers… or perhaps the regulators are all just statists and love the idea that banks should foremost lend money to government bureaucracy, as well as to their intimate friends of the AAArisktocracy they usually see in Davos.”

This fictitious but sadly too real story, is sent upon request to Rep Elijah Cummings and Senator Elizabeth Warren 

PS. I have always believed students should be given access to student debt as if they were AAA rated, because although they might not have an AAA credit rating, they sure have an AAA rated purpose. That said, much much more important than their debts, are their possibilities of future jobs.

World, beware of statist and communists dressed up as bank regulators

In July 1988 the Basel Accord (Basel I) approved that banks had to hold 8 percent in capital (equity) when lending to the private sector but that banks were allowed to lend to OECD’s central governments against no capital (equity) at all.

The introduction of such an amazing pro-government bias, I would even call it outright communism, distorted all common sense out of the allocation of bank credit to the real economy. 

And with Basel II, in June 2004, the Basel Committee made it even worse by allying themselves with the private AAArisktocracy, which of course left even more out in the cold, those we most need to have fair access to bank credit, our SMEs and entrepreneurs. 

And now with Basel III, the Basel Committee, with the blessing of the Financial Stability Board, and counting with the collegial silence of the IMF, is increasing regulatory complexity tenfold, and digging us even deeper into the hole.

PS. And, amazingly, Basel I happened while the attention was diverted discussing the supposed pro-private sector bias of the "Neo-Liberal" Washington Consensus.

PS. And even more amazingly... in its many hundred of pages... the Dodd-Frank Act does not even mention the Basel Accord of which US is a signatory or the Basel Committee

PS. Paul Mason just wrote "PostCapitalism". Since pure capitalism clearly ended with the Basel Accord, he must be referring to PostStateCapitalism.

Western world, it behooves you to understand the following about current bank regulations, and to do something about it.

Banks are currently allowed to hold much less equity against assets perceived as safe than against assets perceived as risky.

That means that banks are allowed to leverage their equity much more with assets perceived as safe than with assets perceived as risky.

That means bank currently obtain much higher risk adjusted returns on equity with assets perceived as safe than with assets perceived as risky.

And that, compared to equity requirements which do not discriminate based on ex ante perceived credit risks, means that banks will lend too much at too low rates to what is perceived as safe, and too little at relative too high rates to what is perceived as risky.

And the supposedly “safe” are sovereigns, basically considered as infallible, the members of the AAArisktocracy, and the housing sector.

And the supposedly “risky” are for instance all those SMEs and entrepreneurs we so much depend on for our economies to move forward, so as not to stall and fall.

And all for nothing! Major bank crises result always from to large exposures to what is erroneously perceived ex ante as safe, and never ever from too large exposure to what is perceived as “risky”.

And the distortions this regulation has created is destroying the Western world that has become what it is, not by risk avoidance, but by the reasoned and sometimes the unreasonable risk taking of our forefathers.

“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd, 1850-1926

How did this monstrous regulatory mistake happen?

First and foremost because regulators concerned themselves with the risk of the assets of banks, which is what bankers should be concerned with, and not with the risk that bankers are unable to manage the perceived risks, or the risk perceptions being faulty, and which is what regulators should be concerned with.

Second by allowing the regulations to take place in a small mutual admiration club of “experts” with no accountability.

Third, by allowing ideology to infiltrate bank regulations to such an extent so as to make it possible for regulators to declare some sovereigns to be infallible, to have a zero risk weight.

Fourth by the fact we live in a world that finds it difficult to imagine, or does not want to recognize, the possibility of experts being so utterly wrong. 

How can we correct for it? Not easy, but it will clearly not happen by allowing the failed regulators to keep on regulating.

And please do not ask bankers to correct it. For them, being able to earn the highest risk-adjusted returns on equity by lending to the “safe”, is a dream come true. 

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 the collapse of our banks”

That AAA-bomb detonated in 2007-08 and its poisonous radiation is still killing our economies. For those coming after us… please do something! 

@PerKurowski

A former Executive of the World Bank (2002-2004)

http://teawithft.blogspot.com

http://subprimeregulations.blogspot.com/

http://financefordevelopment.blogspot.com

http://www.theaaa-bomb.blogspot.com

http://bombaaaa.blogspot.com

PS. Any editing suggestion that could make the explanation more understandable is appreciated on perkurowski@gmail.com

Those in Davos 2015 might be famous and rich but, as the elite the world needs, they don't cut it.

Dumb bank regulators that should be concerned with the possibilities of banks perceiving credit risks wrongly, decided instead to introduce equity requirements for banks based on ex ante perceived credit risks.

And simplistically they applied a more-risk-more-equity and less-risk-less-equity rule, ignoring that a real bank system crisis only results from when something ex ante perceived as absolutely safe, turns out ex post to be very risky.

And that caused banks to lend excessively to some infallible sovereigns, the AAArisktocracy and real estate, which brought on the current crisis 

And that keeps us from getting out of the crisis, since those tough risky risk taking small businesses and entrepreneurs we need to get going when the going gets tough, are denied fair access to bank credit by equity starved banks. 

And this fundamental problematic was not even part of the agenda discussed in Davos 2015. I must say, they might be very famous and rich, but as the financial elite the world needs, those in Davos 2015 don't cut it.

Where were Joseph Stiglitz and Paul Krugman when the Basel Committee decided to odiously discriminate against "the risky"?

We have Nobel Prize winners complaining, over and over again, about how de-regulated bankers messed up the world, without saying one iota about how it really was, with regulators who with their portfolio invariant credit risk-weighted equity requirements for banks, are all to blame for that.

Those bank regulators odiously discriminated in favor of those who already have more access to bank credit, namely the “infallible sovereigns” and the AAArisktocracy. 

Those regulators odiously discriminated against the fair access to bank credit of those we most need to have access to bank credit, like the "risky" small businesses and entrepreneurs. 

Many correctly argue that bankers should have to give back much of their bonuses, if in the medium and long term what they did did not work out alright. In the same vein there should perhaps be a claw-back clause on Nobel Prizes.

All our bankers (including Jamie Dimon) betrayed us citizens by selling out to sovereigns and the AAArisktocracy.

Bank regulators, and because these borrowers are perceived as absolutely safe, allow banks to have much less equity when lending to sovereigns and the AAArisktocracy, than when lending to “risky” small businesses and entrepreneurs.

And that means that banks make much higher risk adjusted returns on equity when lending to the safe than when lending to the risky… and bonuses receiving bankers of course love it.

Some bankers, those who use very low equity requirements as hormone supplements, in order to grow into Too-Big-To-Fail-Banks, love it especially much.

And the bankers love it so much they do not care one iota about that this effectively blocks “The Risky” from gaining fair access to bank credit; or about that this pushes our economies more into the hands of the unholy alliance of governments, AAArisktocrats and some few TBTF-banks.

Yes, we citizens, we who need our banks to give small businesses, entrepreneurs and start-ups lots of access to bank credit, because that is how the future of our grandchildren is financed, we have been betrayed.

We are told that this is all in our best interest, because that is the way banks avoid taking the risks which would cause us tax-payers having to pay for supporting failed banks. Lies, lies, lies! 

What’s so good about low taxes when these regulations stand in the way of our possibilities of high pre-tax earnings? 

And, on top of it all, the real risk for banks never really exist for that which is perceived as "risky", it always derives from that which is perceived as "absolutely safe"… like “infallible sovereigns” and splendid credit ratings.

Scene 5 on the crazy reality lived while “Banking in times of the Basel Committee”

Jr. Credit Officer Martin: “Sir, I am not sure AIG deserves its AAA rating, and we keep somewhat important exposures to it. May I take a couple of our officers and assign them to do a little credit worthiness research on their own?”

Bank President Wally: “Have you gone raving mad? Do you know what that would cost? And who is going to pay us for that? The credit rating agencies have access to privileged information that AIG would never ever dream of giving to you, much less if they got hold of that you questioned their AAA rating...  So forget it! If the Base Committee and the Financial Stability Board considers that being able to get an AAA rating from a credit rating agencies merits us to being able to leverage our equity more than 60 times to 1, then those ratings must be good enough for us”

Jr. Credit Officer Martin: “But Sir?”

Bank President Wally: “No! No I do not want to hear any more buts from you! Have you no idea what the low, almost non-existent equity requirements for anything related to a good credit rating, the AAArisktocracy, has to do with the extremely high returns on equity our shareholders obtain... or with the fairly decent bonuses we get?”

Scene 1

Scene 2

Scene 3

Scene 4
Scene 6

I have a very specific question for President Obama on his State of the Unions address.

President Obama in his State of the Union Address — Remarks As Prepared for Delivery states:

“Will we accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?”

And which makes me ask: Are we supposed to keep bank regulations who so much favors the infallible sovereigns’ and the AAArisktocracy’ access to bank credit, when compared to that of the “risky” small businesses’ and entrepreneurs’?

To me it is amazing to see how much regulatory aversion against “the risky” exists in the home of the brave.

http://subprimeregulations.blogspot.com/2010/04/please-explain.html

http://subprimeregulations.blogspot.com/2013/11/have-risk-weights-of-current-bank.html

http://subprimeregulations.blogspot.com/2012/07/complaint-i-presented-to-consumer.html

Excuse me Mme. Lagarde, but you and the IMF, are so astonishingly wrong

Christine Lagarde, the Managing Director of the International Monetary Fund, in a speech titled Three “Rosetta Moments” for the Global Economy in 2015 delivered January 15, 2015 stated:

“If there is one lesson from the Great Recession, it is that you cannot have sustainable economic growth without a sustainable financial sector.”

Sincerely, excuse me Mme. Lagarde, but you are so astonishingly 180 degrees wrong.

Current difficulties derive directly from the fact that bank regulators, trying to bring stability, sustainability, to the banks, concocted portfolio invariant credit risk weighted equity requirements. And these allowed banks to earn much much higher risk adjusted returns on equity when lending to the “infallible sovereigns”, the housing sector and to members of the AAArisktocracy than when lending to “the risky”.

And so, as should have been expected, because it is always excessive exposures to what is perceived ex ante as absolutely safe that causes bank crises, we ended up with excessive banks exposures, against much too little bank equity, to AAA rated securities, to the real estate sector (Spain) and to sovereigns like Greece.

And so, as should also have been expected, because banks naturally search to maximize their risk-adjusted returns on equity, the banks abandoned those who are most in need of credit, those same our real economy most need to have access to bank credit, namely “the risky” small businesses and entrepreneurs.

And all this simply because regulators obnoxiously regulated our banks without defining a purpose for these any different from just being safe and convenient mattresses in which to stash away our money.

Mme Lagarde: If there is one lesson from the Great Recession, it is that you cannot have a sustainable financial sector without sustainable economic growth.

We hear all the time about the need to save taxpayer, but to save taxpayers by reducing even more their taxable earnings, sounds about as silly as can be.

Mme Lagarde states: “we must complete the agenda on financial sector reform”. Absolutely, but not by having the same regulators, taking us with their Basel III on even more shady and curvy roads, in the same dumb direction.

PS. Mme Lagarde, this is not the first time I comment on this to you... for example:

http://subprimeregulations.blogspot.com/2013/10/my-question-for-umpteenth-time-to-world.html

Europe, America, you might use the average risk aversion of nannies, but, never ever, as the Basel Committee does, use a sum of these.

Let us suppose a perfect credit rating. 

And that perfect credit rating is then considered by the banks and the market in general, and cleared for by interest rates, the size of the exposure and other terms.

But when bank regulators (Basel Committee) ordered that perfectly perceived credit risk, to also be cleared for in the capital of banks, then they completely messed it up.

Because a perfectly perceived risk, when it is excessively considered, causes an imperfect reaction to it. 

Let me explain it in the following way: 

Figure out the average risk aversion of nannies when letting your kids out to play… that might not be the best risk aversion to use, it might be too high, but anyhow it is acceptable. 

But, never ever add one nanny’s risk aversion to that of other nannies, because then your kid will never ever be allowed to go out and play… 

And if your kids only stay “safe” at home, they will eat too many cookies and turn obese… like some of their nannies.

And that’s what we have now, banks staying home, playing it safe and turning obese by lending to “infallible sovereigns”, house financing and member of the AAAristocracy or the AAArisktocracy; while not going out to play, in order to develop muscles, for instance by lending to small businesses and entrepreneurs.

Our banks no longer finance the "risky" future they just refinance the "safer" past.

You can use their average risk aversion,
 but, for the sake of our kids (and our banks) please, never ever the sum of it

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

Bye bye Europe! Having introduced financial feudalism, Europe has gone back to the Middle Ages.

The AAAristocracy, those who posses or have access to an AAA rating; and the sovereigns, those who have declared themselves to be infallible have, with the witting or unwittingly cooperation of neo-vassal bank regulators, managed to introduce a system that guarantees them, more than ever, preferential access to bank credit.

That has been achieved by means of the portfolio invariant credit risk based capital, meaning equity, requirements for banks. More perceived credit risk - more equity; less risk - less equity. Because that insidious piece of regulation allow banks to earn more risk-adjusted returns on equity when lending to the AAAristocracy or when lending to the “infallible sovereign”, than when lending to the “risky”, like to small businesses and entrepreneurs.

And, as anyone should be able to understand, the more you subsidize the access to bank credit for some, in this case through regulations, the harder it is for those excluded to compete for it.

In short, a sort of financial feudalism has taken over Europe. 

And since that impedes fair access to bank credit, the land, to those Europe most needs to have it, its peasants, there is but one way it can go... and that is down down down.

And clearly this odious discrimination against the opportunities of the peasants, can only increase the inequalities in the society. 

But of course it will all come to an end, when the banks fail because of lending too much at too low rates, to a not so infallible sovereigns or to a false AAAristocrat... since that is why banks have always failed. Never ever have they failed by lending too much to peasants.

PS. It is not only Europe that is affected. The Basel Committee is spreading financial feudalism around the world... now even in America, "the land of the free", they have AAAristocrats... more precise yet AAArisktocrats

America, more bank capital (equity) required for loans to “The Risky” than to “The Infallible”, is contrary to Liberty & Opportunity

Yesterday, in the good company of friends who value liberty above all, I visited the Statue of Liberty for the first time. As a son of immigrants, though not to America, looking at her my eyes went tearful, thinking about the challenges of leaving all behind, and beginning, from scratch, a new life in a new unknown foreign country.

And sitting there listening to a great audio guide I was reminded all the time of that she, Lady of Liberty, stood there greeting all, to the Land of Freedom and Opportunities.

And it all made me reflect again on the fact that current bank regulations, odiously discriminate against what is perceived as “risky”... And my eyes went tearful again. Let me explain.

Of course, a newly arrived unknown immigrant, with nothing or little to his name, would be perceived as risky by any banker, and therefore be charged higher interests, be lent lesser amounts, and have to accept stricter terms, than what applied to those residents of the Americas who already had the opportunity to made a good name and some assets for themselves.

But, those days, luckily, there was not a bank regulator in America who ordered that, on top of a bankers natural risk-adverseness, banks also needed to hold much much more capital when lending to “The Risky” than when lending to “The Infallible”.

And so those days’ bankers were free to apply their own criteria, and “The Risky” free to access opportunities, without the interference of some dumb and overly concerned nanny.

Now though, since 1988, Basel Accord, bank regulations are based on capital requirements which are much much lower when lending to “The Infallible” than when lending to “The Risky”. And that means that banks make a much much higher risk-adjusted return on assets when lending to The Infallible, than when lending to The Risky.

And that means that a current immigrant, or an American who has not yet made it to the AAAristocracy (or the AAArisktocracy) has much lesser opportunities of obtaining a bank credit to make real the kind of America’s dreams which made America what it is… because please don’t tell me that America was just built upon house ownership credit cards and consumption.

Dear Friends, "The Home of the Brave" should not accept this kind of suicidal regulatory risk-aversion, which stops banks from financing the "riskier" future and only propels these to refinance the "safer" past.

By the way I read the law, though only a layman it seems to me it is even prohibited.

God make us daring!

PS. On any Thanksgiving Day, Americans should be deeply grateful for all those who dared take the risks they all needed, and for those days bank regulators did not stand in their way. 

PS. I am not an American, but since my father was freed from a concentration camp by Americans in 1945… I confess being much biased in its favor… at least of that 1945's America.

PS. I have absolutely no objection to all the security measures taken around the Statue of Liberty but, the way some security officers voiced their authority, unfortunately, made me think of a sacrilege.

PS. Risk weights of 100% for the Sovereign and 0% for “We the People” reads like a slap in the face of USA’s Founding Fathers

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for banks.

PS. And here are some of my early opinions on these regulations, some of them while being an Executive Director at the World Bank, 2002-04

PS. And here is a very humble home-made youtube comment on it all, from 2010

Here is THE QUESTION for Janet Yellen during her US Senate confirmation hearings as Chair of the Federal Reserve

Ms. Janet Yellen

Is it not a fact that, with the sole exceptions of when pure fraud was present, all major bank crises have always resulted from excessive exposures to what was ex ante perceived as “absolutely safe”, and never ever from excessive exposures to what was ex ante perceived as “risky”?

And, if so, can you please explain to us the rationale behind the pillar of current regulations, the risk weighting of the capital requirements, which allow banks to hold much much less capital against what is ex ante perceived as “absolutely safe” than against what is perceived as risky?

Could it not be that in reality it should perhaps be the complete opposite?

Is it correct that in the “home of the brave” we impose this type of bank regulations which discriminate against those perceived as “risky”? And by the way, is such thing really allowed under the Equal Credit Opportunity Act, “Regulation B”?

Finally, do not these regulations created such distortions that it makes it impossible for the banks to allocate credit efficiently in the real economy? 

PS. Oh I almost forgot. I remember the Constitution of the United States of America, in Section 8 states “The Congress shall have the power to…fix the Standard of Weights and Measures.” Can you please refresh our minds as to when we delegate fixing the risk-weights to the Fed?

PS. Oh and I almost also forgot too. The US Constitution in its section 9 states: “No Title of Nobility shall be granted by the United States”. Now, is that not something that de facto happens when we sort of recognize the existence of an AAAristocracy or AAArisktocracy?