Is the problem with our bank regulators a lack of testosterone?

We have read a lot about excessive testosterone levels producing excessive risk taking, for instance in banks. But, could a deficiency of testosterone equally produce an excessive risk aversion.

Let me explain. Even though the credit risks perceived by bankers are already cleared for by means of the size of the exposure and risk premiums, current bank regulators imposed on banks higher capital requirements for what is perceived as risky than for what is perceived as safe. 

And the above is like adding up the risk aversion of two nannies before deciding what the children can do; and so of course the children are not allowed to do much; and so of course banks will lend too much to the “safe” and too little to the “risky”… and so of course there is a monstrous distortion of the allocation of bank credit to the real economy.

To top it up, it does not serve any stability purpose, since all major bank crises have always resulted from excessive exposures to what was erroneously considered “safe” and never ever to something correctly perceived as risky.

This, being so scared of what is perceived as risky and so little suspicious of what is perceived as safe, is so loony that perhaps it points to a hormonal imbalance. Could it be that current bank regulators have a serious lack of testosterone?

I, as many others, suffer from too much risk aversion, and so I could be suffering from that lack of testosterone too. But, in me, that deficiency presents no major problem, except perhaps for my kids who might therefore not inherit what they could inherit. But, when the testosterone deficiency is present in those who regulate our banks, then we are talking about that kind of systemic illnesses that can even bring a Western world down on its knees.

God make us daring!

PS. Again. If you lend too much to what is perceived as risky and too little to what is perceived as safe, then it might be because of excessive testosterone… why then can if you lend too much too what is perceived as safe, and too little to what is perceived as risky, not be a lack of testosterone?

More than "The Voice" and "American Idol" we need a TV competition to elect better bank regulators.

There I was trying to dry my hands wringing them in some tepid air blowing from the round hole of an appliance, thinking about how much more efficient the flat whole hand reaching drier was, when suddenly I thought… if I were a bank regulator I would at least give Dyson’s engineering group a call to see what they would think I should do….

And from there my mind wandered of into thinking about how monumentally important banks are too our economy… and about how monumentally crazy we have been allowing some very few untested bureaucrats, who we know very little about, to draw up the regulations that defines much of the functioning of our banks all around the world…

And into thinking that the least we could have done was to set up a public competition to search for the best bank regulations, similar to that which awarded Brunelleschi the right to build the dome of the cathedral in Florence.

And into thinking that such competition should be televised, perhaps ‘The Regulator’, so as to better ascertain that the interests of all stakeholders in banks were represented, not just those bankers who just think of banks as profit making machines, and not just those risk adverse nannies who think of banks solely in terms of more sophisticated places to stash away money than mattresses…

And finally into sadly reflecting on that in such a competition, the Basel II and Basel III bank regulation drawings would not make it into the final 12, probably not even pass the early qualification round…

I could imagine the judges asking the members of the Basel Committee.

“Do you really believe ordinary bankers to be so dumb, so you must require them to hold 5 times as much capital (equity) when they lend to someone they know has a BBB+ to a BB- rating, or no rating at all, than when they lend to someone they know has an AAA to AA rating?

Or, are you really so dumb to believe bankers when they argue they should be allowed to hold only a fifth of capital when lending to someone who has an AAA to AA rating, than what they are required to hold when lending to someone with a BBB+ to BB- rating, or no rating at all? 

Don’t you know bankers already adjust to differences in credit ratings by means of interest rates and the size of exposure they are willing to take, for you to also require these to adjust the capital they need to hold… 5 times?

Don't you think this would utterly distort the allocation of bank credit to the real economy… with those having BBB+ to BB- ratings, or no ratings at all, getting much too little bank credit, and those with AAA to AA ratings getting much too much bank credit?”

And here, I could imagine the experts of the Basel Committee and their family members of the Financial Stability Board, becoming quite teary-eyed.

And I could hear the judges concluding: “There is no chance someone would want regulations which, in the name of what at best could seem like short term bank stability, discriminates against those who we in fact most need to have access to bank credit, the “risky”, like middle and small businesses, entrepreneurs and start-ups, those who might get us the next generation of jobs, favoring an AAAristocracy.”

And then I could hear another contestant auditioning: 

“We must of course start with asking ourselves what is the purpose of our banks and in this respect I suggest we remember John Augustus Shedd’s ‘A ship in harbor is safe, but that is not what ships are for’’’. 

And I could hear and see in front of me the judges standing up and enthusiastically applauding. 

And so I concluded…let a 1.000 regulation proposal’s bloom! And let us hope the final regulations can infuse our bankers with reasoned audacity, and not disable them with an extreme aversion to credit risk. Enough of this insane de-testosterone-mania! We send our kids to war but we don't allow our banks to take the risks we need them to take?

What caused regulators to concoct crazy risk-weighted bank capital requirements? Lack of testosterone, cortisol, cocaine, hubris or ideology?

The pillar of current bank regulations are the risk weighted capital requirements for banks. For instance in Basel II: 0 percent when lending to an “infallible sovereign”; 1.6 percent when lending to a slightly less “infallible sovereign”, or to a private member of the AAAristocracy; and 8 percent when lending to “a risky” medium and small businesses, or to an entrepreneur or a start-up.

John Coates a PhD research fellow in neuroscience at the university of Cambridge in his “The hour between dog and the wolf: How risk taking transform us, body and mind” writes “The financial system, as we have recently discovered to our dismay, balances precariously on the mental health of [financial] risk-takers. And he mentions testosterone, cocaine and hubris as risk-taking inducers; and cortisol as a risk-aversion generating hormone.

It would be interesting to hear John Coates opinion of what he thinks was present in the bodies’ of bank regulators when they concocted their regulations.

For instance, was it cortisol which made regulators so adverse to banks taking any kind of risks? Clearly, by allowing banks to earn so much higher risk-adjusted returns on equity when lending to the “absolutely safe” than when lending to “the risky”, they evidenced they were so insanely risk-adverse against banks running into short term problems, they even preferred to risk the misallocation of bank credit, something which had to guarantee that our real economy, and our banks, would run into problems long term.

Or was it testosterone, cocaine, or hubris which turned our bank regulators, those who foremost should be on the outlook for unexpected losses, into some risk taking monsters?  Allowing banks to leverage their equity 62.5 to 1 when lending to a private corporation, only because of AAA ratings, or to a nation with ratings such like those Greece had; or to even assume the existence of “infallible sovereigns” and in which case they allowed banks to leverage their capital infinitely… points at nothing else but insane risk-taking. Unless they are plain dumb something external must have influenced regulators to blind themselves to the fact that financial crises are never caused by excessive exposures to "the risky", but always by excessive bank exposures to something erroneously thought as "absolutely safe"

Coates refers to Lord Owen, a former British foreign secretary and a neurologist by training describing the “hubris syndrome” as “a disorder of the possession of power, particularly power which has been associated with overwhelming success, held for a period of years and with minimal constraint on the leader [which] can result in disastrous leadership and cause damage on a large scale. And Coates further clarifies it writing “This syndrome is characterized by recklessness, an inattention to detail, overwhelming self-confidence and contempt for others.”

I do not know about testosterone, cortisol or cocaine but,  since I quite recently heard one of the most important bank regulators saying “if bankers don’t like it, let them be shoemakers” I would settle for the hubris of bank regulators, that which made them think they could act as risk managers for the whole world, as being the principal cause of the financial crisis… sprinkled of course with a heavy dose of ideology.

In Bill Easterly´s terms... God save us from the tyranny of experts!

Europe’s unemployed youth, is a result of expulsing testosterone from its banking system. Is it accident or terrorism?

To call banks cuddling up excessively in loans to the Infallible Sovereign and the AAAristocracy, an excessive risk-taking which results from too high testosterone levels, is ludicrous. That is just cowardly hiding away, guided by computer models, in havens officially denominated as absolutely safe.

The risk-taking which requires true banking testosterone is the lending to medium and small businesses, entrepreneurs and start ups.

Unfortunately bank regulators, by means of allowing for far less capital when lending “to the safe than when lending to “the risky”, guaranteed that the expected risk-adjusted returns on bank equity when lending to the former were much much higher than when lending to the latter. 

And, as any economist knows, equity goes to where the highest returns are offered. And so bankers possessing true testosterone, were all made redundant. And since the safe jobs of tomorrow need the risk-taking of today, and “the risky” got and get no loans, the European youth ended up without jobs… or even the prospective of jobs.

I have always thought this regulatory calamity was an accident resulting from allowing some very few regulators to engage in intellectual incest, in some small mutual admiration club where it is prohibited by rules to call out any member as being at fault.

But now, since more than five years after the detonation of the bomb that was armed in 2004 with Basel II, the issue of the distortion these capital requirements produce in the allocation of bank credit in the real economy is not yet even discussed, reluctantly, because I am no conspirator theories freak, forces me to admit the possibility of terrorism.

And frankly what is the difference between injecting bankers with a testosterone killing virus, and doing so with a mumbo jumbo bank regulation no one really understands?

Poor European youth… they are not yet aware that unless they expulse the current bank regulators from the Basel Committee and the Financial Stability Board, for being dumb or terrorists, they live in an economy that is going down, down, down.

“L'economia castrata”: The castrated economy which resulted from when regulation nannies castrated our banks

What would you think of a military high command that ordered a testosterone reducer to be fed to the soldiers so they would expose themselves less to risks, and so fewer of them would die? Right! That would indeed be high treason, as it would guarantee defeat. 

But that is precisely what bank regulators have done to our banks: 

Current capital requirements for banks, based on ex ante perceived risk, allow banks to hold much-much less capital on assets perceived as “absolutely safe” than on assets perceived as “risky”. 

That allows banks to earn much-much higher risk-adjusted returns on equity, when lending to “The Infallible”, than when lending to “The Risky”; 

And that results in that banks will lend, even more than usual, at even lower rates than usual, to sovereigns, housing and the AAAristocracy; and even less than usual, at even higher rates than usual, to medium and small businesses, the entrepreneurs and start-ups. 

And those regulations signify, as you can understand, a powerful testosterone inhibitor. 

And so the regulators have effectively castrated the banks and as a result we have a castrated economy with growing dangerous obese exposures to what was or is officially deemed as “not-risky”, triple A rated instruments and “infallible” sovereigns and housing; and equally or even more dangerous anorexic exposures to what is officially perceived as “risky”, like small and medium businesses, entrepreneurs and start-ups. 

God save us! From dumb regulators who do not understand that risk-taking is the oxygen of any movement forward. 

And before we get the testosterone level of banks back to normal, there is no stimulus package that will work, and we will only be wasting away whatever little fiscal and monetary policy space remains. 

God make us daring!