1988 Basel Committee #BCBS eclipsed the Western World’s banking system

1988, Basel Committee’s risk weighted bank capital/equity requirements, eclipsed our economies, darkening these with risk aversion.

No one in the Western world, which for centuries had been empowered by its willingness to take risks, came out to see it.

https://subprimeregulations.blogspot.com/2023/09/ai-chatgpt-openai-if-we-compare-economy.html

https://x.com/PerKurowski/status/1777416470911180888

1988, with bank capital/equity requirements that implied bureaucrats know better what to do with credit, for which repayment they’re not personally responsible for, than e.g., small businesses, our free-markets were eclipsed by sheer politics/communism. 😡

http://subprimeregulations.blogspot.com/2015/07/just-before-fall-of-berlin-wall.html

https://x.com/PerKurowski/status/1778015304452354441

Many decades later, the regulators, having added thousands of complexities, and of course ten thousand of jobs for them and bank supervisors, they still obscure it all.

If “Wall Streeters and other analysts/lobbyists are piecing together the consequences of the 1.087 pages proposal that constitutes the finale of the global regulatory response to the 2008-09 financial crisis”, what tells us regulators have the faintest of what’s in there?

https://subprimeregulations.blogspot.com/2023/07/wake-up-banks-should-be-banks-not.html

https://twitter.com/PerKurowski/status/1686207112588779520?s=20

Finance and economics professors, journalists and alike, they don’t need protective glasses, since they don’t even want/dare to look at it.

Why do finance professors keep silence on that the risk weighted bank capital requirements distort the allocation of credit? 🤔

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Upton Sinclair Jr.

https://subprimeregulations.blogspot.com/2018/01/why-are-not-absurd-risk-weighted.html

https://x.com/PerKurowski/status/1777360391967785203

Why do Nobel Prize winners in Economics still keep silence on that the risk weighted bank capital requirements distort the allocation of credit? 🤔 They might be scared the Nobel Prize Committee will ask them to return the Prize and the money… since:

How can a heliocentric mind win a Prize in Economic Sciences in Memory of Alfred Nobel when he must be nominated by a geocentric central bank, Sveriges Riksbank.

http://subprimeregulations.blogspot.com/2021/06/couldwould-inquisition-tribunal.html

https://x.com/PerKurowski/status/1689660620541423616

But of course, some bankers love it (and others don’t)

The risk weighted bank capital requirements empowered dangerously creative capital-minimizing/ leverage-maximizing financial engineers; and sent the savvy loan officers home.

That has increased the risk for bank systems and has weakened the real economy.

https://subprimeregulations.blogspot.com/2014/07/mr-george-banks-asked-about-cocos.html

https://x.com/PerKurowski/status/1711008498367017346

On the morality of current banker's decisions

A banker confronts a choice:

On one hand, Alt. A, a number of not so creditworthy borrowers who are asking for small loans, accepting to pay what could rightly be deemed a bit higher interest rate than what the risk adjusted interest rate should be.

On the other hand, Alt. B, a very creditworthy borrower, that is asking for a very large loan, at a rate lower than what an adequate risk adjusted interest rate should be.

Years ago, the banker would gladly gone for Alt. A, but, after the introduction of risk weighted bank capital requirements, which mean banks can leverage much more with what’s more creditworthy than with what’s less so, means the bank would obtain a higher risk adjusted return on its equity with Alt. B.

A banker has to pick Alt B. or he’s toast… and so he picks it… (that is unless he would not want to be a banker any more… and instead, like George Banks, go and fly a kite)

In reference to Per Bylund’s twitter thread on “morality of actions”, how would you classify the banker’s action.

If a banker, I would ask: Is our bank being fooled by Basel regulators to dangerously overcrowd safe havens?

Gentlemen,

We are allowed to hold less capital against what is ex ante perceived (decreed or concocted to be safe than against what I perceived to be risky.

That, when compared to if we had to hold the same capital against any asset now permit us to expect higher risk adjusted returns on equity for what is perceived as safe than on what is perceived as risky.

To be able to earn more ROE on the safe than on the risky sounds wonderful, but it has its costs: 

First we might be willing to accept risk adjusted rates from “the safe” than might be lower than what would be the case in an undistorted market.

Second, to compensate for the above, we might be requiring “the risky”, like SMEs and entrepreneurs to pay us higher risk adjusted rates than what they would have to pay us in the case of an undistorted market, and that means we might lose out on some interesting business or otherwise make “the risky” riskier. 

If it was only our bank that had access to this regulatory distortion, then we might benefit without rocking the boat, but the fact is that the whole banking system is doing the same, and so the distortions in the allocation of bank credit to the real economy are huge.

So friends, it is clear that if we go on following the directives of our bank regulators, and basically only keep to refinancing the safer past, we are doomed to end up, sooner or later, gasping for oxygen in an overpopulated safe haven. 

And by abandoning the financing of the riskier future, we are also neglecting our duties to the real economy, and our children and grandchildren might, should, hold us accountable for that.

So what are we to do? What can we do? 

May I suggest we look into the possibility of ignoring the different capital requirements and, based of course on a sound bank diversification and portfolio management, begin, without discrimination, to look at the risk premiums offered by all, risky and safe, on an equal dollar to dollar basis.

Or, as our famous colleague Mr. George Banks once suggested, we could all go and fly a kite!

Mr. George Banks, asked by his board about risk weights, Tier 1 capital and AT1 / CoCos, decides to better go and fly a kite

At the Board of Directors of Dawes Tomes Mousley Grubbs Fidelity Fiduciary Bank

Mr. Dawes Sr asks: Mr. Banks as it is for us to decide what do you suggest we do?

Should we stop lending to our old and loyal small businesses and entrepreneurs which, because of their high risk weights might lead us to not be in compliance with Tier 1 capital requirements?

Because if we do not do so we will force those old and loyal investors of ours who bought our Contingent Convertible bonds, the CoCos, because they paid slightly higher interest, to convert these into bank shares.

Mr. Banks answers: Yes banking, used to be such fun for a loan officer like me but, since those equity minimizing / leverage maximizing financial engineers took over, that has all changed. It's now all too loony and strange to me. So sorry Sir, I really don’t know how to answer your question, perhaps I better go and fly a kite...

Yes, indeed I think I will!!!

Splendid idea George, with loony regulators like the Basel Committee we all better fly a kite too!

Caveat emptor!

Our dear George Bailey would also not have stood a chance against a Basel Committee.

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

Dialoguing with ChatGPT and Grok on current bank regulations

The confession of a "monstrous" banker

George Banks (the first)

Dear Per

I thought it was a good thing for my bank to purchase AAA rated securities collateralized with mortgages to the subprime sector, and to lend to A+ rated Greece, since in both cases my regulator only required me to hold 1.6 percent in capital against these assets, and which meant that my bank could leverage its capital 62.5 times to 1. 

More so, was my bank not to engage in these operations, it might lose out to other banks who by doing so would earn much higher returns on equity… to such an extent that they might even end buying up my bank, and then I would find myself in the awkward position of having to work for a too-big-to fail bank. 

What should I have done? What would you have done? Did that turn me into a vile bankster? Per, help me some even want to put me in jail!

Your banker friend 

George Banks III

PS. My answer

Dear George

Don't feel bad. I have not held you responsible for any of this mess for even a second. 

As an Executive Director of the World Bank, in a formal written statement in October 2004 I warned: “I believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

And in January 2003 in a letter published by the Financial Times I had written: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

And yet I really doubt that, if in your shoes, I could have put a stop to the purchase of the highly rated securities, or convinced any bank colleagues that they should incur in the costs of a special check up to see if their credit ratings were correct or not.

That said I do condemn though the regulators, those who created the temptations of the 60 to 1 or more authorized bank leverages. I can guarantee you that, in the absence of these loony regulations, there would never ever have been such a demand for these so subprime securities which created this crisis, or to indulge in excessive bank lending like to Greece. The Basel bank regulators, hopefully unwittingly, let us at least pray for that, they were the real vile Lucifers in this disaster.

Your non-banker friend that with much fondness remembers your ancestor George Banks

Per

PS. George perhaps this would, way back, have also made your ancestor to go and fly a kite instead.

Dialoguing with ChatGPT on current bank regulations