Let us thank our lucky star the credit rating agencies were not that good

Bank regulators gave tremendous importance to credit ratings, especially in the Basel II package approved in June 2004. 

One of the problems with that is that if a credit rating has already been issued, and if it is good one, like an AAA, there is absolutely no incentive for a second opinion, as no one is going to pay the price of a second opinion that might differ from the first opinion, only once in awhile. And this is especially true if the First and Official Opinionater, has had access to privileged information about the borrower, as they very often have. 

Though we are indeed already suffering seriously the consequences of some of the credit ratings being wrong… can you imagine where we would be if they had delayed making their mistakes ten more years, and the banks and regulators had had the time to invest so much more trust in them? Can you imagine the altitude from which we would have fallen? 

Indeed there is someone looking after us! So at least let us be grateful for that and make amends! 

PS. What on earth do you think I was referring to, when in January 2003, in a letter to the Financial Times I wrote, “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”?

Homeland Security, bad bank regulations could be used as a lethal weapon of terrorism

Mark Twain is attributed having said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” and yes, we all know that bankers are characteristically risk-adverse. 

What then if someone somewhere concocted a biochemical agent that made the bankers even more risk-adverse, perhaps a testosterone reducer... a de-testosteroner. Would that not be classified as an act of terrorism, even if the chemist proved there was absolutely no bad intention?

But that is what effectively bank regulators did, when they allowed banks to have much less capital  (equity) when lending or investing in what was officially perceived as "absolutely safe", than the capital (equity) they were required to hold against any asset officially perceived as risky.

That allowed banks to earn higher risk-adjusted returns on equity when lending to "the infallible" than when lending to "the risky", something which introduced the mother of all distortions in how bank credit was allocated to the real economy.

As should have been expected, the result was a crisis that destroyed the economy of the US; by dangerously overcrowding the perceived safe-havens, like triple-A rated securities and infallible sovereigns (Greece); and by causing the equally dangerous underexposure to what is perceived as being risky, like in lending to small businesses and entrepreneurs. 

Honestly, is the willingness of the banks to take risks not a matter of national security for the Home Of The Brave?

Why do we so easily accept the distractionary explanation that the current crisis was caused by excessive risk-taking when so clearly all the serious losses have been in what was officially considered as the safest type of bank lending and investment?

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

PS. By the way, what would the Founding Fathers have said about this?

AI's ChatGPT seems to agree that would be a responsibility of Homeland Security

A fundamental question to the Republican candidates that has never been posed

Currently, the banks of the United States of America, the land of the brave and the home of the free, if they lend to an American small business or an American entrepreneur need to hold about 8 percent in capital, but, if lending to the US government they need zero capital.

Do you believe this is how it should be and do you believe this helps job creation?

Holy moly: Banks were drugged by Basel’s rulebook

LET’S suppose that the human, fallible credit rating agencies produce ratings that are absolutely perfect in terms of measuring the risk of default; and that banks use these ratings to choose who to lend to, at what rates and under what conditions.

But then let us add that bank regulators, such as those in the Basel Committee, believing they could act as risk-managers for the world, imposed on banks capital requirements based on perceived risks and specifically referring to the risks already reflected in the ratings.

The product is a hallucinogen, a bankers’ LSD. It increases the banker’s sensitivity to risk: he sees good credit ratings in much brighter lights; not-so-good ratings seem far scarier.

For anyone interested in finance and not engaged in regulatory group-think, the consequence of that hallucinogen must be excessive bank exposures to what is officially perceived as not risky – for instance, triple-A rated mortgage-backed securities or “infallible” sovereigns. The result is a dangerous overcrowding of the safe-havens and a growing bank underexposure to what is officially perceived as too risky: for instance, lending to small businesses and entrepreneurs. That is an equally dangerous outcome, because of the lost opportunities to create the next generation of jobs for our grandchildren.

All of these effects come about before we even enter into a discussion of the issue that the credit ratings are also sometimes wrong.

Regulators and experts have been able to spin this crisis as a result of excessive risk-taking when it is evidently the result of regulatory nannies suffering an excessive aversion to risk.

A couple of years into this crisis, now threatening to take the Western world down, the issue of how capital requirements drugged the banks is not even discussed, and, because of that, failed regulators are allowed to proceed with a Basel III, built upon precisely the same failed regulatory paradigm. Holy moly.

Who am I? In 1999, 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.”

In 2003, I wrote again: “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.”

As an executive director of the World Bank, in October 2004, my formal written statement delivered at the board warned: “We 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.”

I am someone who was much too right, much too early for his own good.

I am not someone who argues that bank regulators were an acceptable 8.17 degrees off target, but who argues they were 180 degrees wrong. In other words, one who wants to – Occupy Basel.

Per Kurowski is a Venezuelan citizen who served from 2002-04 as one of 24 executive directors at the World Bank

Basel's monstrous regulatory mistake

Published in City A.M.

“Margin Call” sells it as a surprised discovery of faulty volatility assumptions. Bullshit!

October 19, 2004, in a formal statement delivered as an Executive Director at the World Bank Board I wrote: 

“Phrases such as ‘absolute risk-free arbitrage opportunities’ should be banned in our ‘Knowledge Bank’. We (I) believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.” 

And I was even only a lowly financial and strategic consultant who had never worked in the area of investment banking or portfolio management.

As others who might have made similar warnings I was just too right too early… and therefore I and many others are now being ignored by all those who have an interest in wanting to explain the current crisis as a Black Swan event… and by those media producers who feel more comfortable with their Monday Morning Quarterbacks.

Stop the Basel Committee from peddling its hallucinogen, its banker’s belladonna

Capital requirements for banks which allow for very little bank equity when the credit ratings are good, and require more of it when they are not, is a very dangerous hallucinogen, in that it increases the sensitivity of the banks to the signals the credit ratings emit. 

This, the banker’s belladonna, is precisely the cause of the monstrous crisis that is threatening the whole Western World. Its consumption causes growing excessive dangerous bank exposures to what is officially perceived ex-ante as not risky, like to triple-A rated securities and to infallible sovereigns, and a growing, equally dangerous, bank underexposure to what is officially perceived as risky, like of the lending to small businesses and entrepreneurs. 

We need bank regulators who know that a risk signal can only be valid if interpreted adequately. Occupy Basel!

http://subprimeregulations.blogspot.com/2011/04/basels-monstrous-regulatory-mistake.html

In banking, when will the shadows take over?

Bank regulators, in Basel II, allow the banks to lend to a corporate rated AAA holding only 1.6 percent in capital but require them to have 8 percent when lending to a BBB rated corporate. That discrimination, when compared to what would have happened in an undistorted market, results of course in much more lending and at cheaper rates to the “safe” AAAs, and much less and more expensive lending to the BBBs.

That of course led to the current crisis of overexposures to what is perceived ex-ante as absolutely not risky; and the continuously dangerous overcrowding of safe havens, like lending to AAAs and infallible sovereigns; and the insufficient exploration of risky but potentially rewarding bays, like lending to small businesses and entrepreneurs. 

The question is, how much can you discriminate against risk-taking in the formal banking sector before the shadow banking, “la banca sommersa”, takes over?

Another letter in The Washington Post: Handcuffed by a triple-A rating

Handcuffed by a triple-A rating

The headline on Mohamed El-Erian's Jan. 1 op-ed asked, "Who will save the triple-A rating?" This makes for a good opportunity to remind everyone that the United States, and the Western world, did not become what they are by sticking to the super-safe. They did it by allowing their risk-takers to take risks. A triple-A credit rating is a result, not a precondition.

If the United States is going to lose its triple-A rating because it is taking the kind of risks that are necessary to make the wheels of its development move forward, creating jobs for our grandchildren, that should be welcome. But if it is going to continue the current pattern, set out by loony bank regulators, of blindly avoiding perceived default risks and dangerously overcrowding the safe havens, then it is lost.

The expert financiers worrying about a triple-A rating are also navel-gazing. Much more important than a triple-A for the United States is the fact that this country is, by far, the foremost military power in the world. Lose that supremacy and all hell breaks loose. Keep it and a BBB rating could do.

Washington Post

My letters in the Washington Post on bank regulations:

September 6, 2007: Factors in the Financial Storm
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation
January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe
July 11, 2018: There is another tariff war that is being dangerously ignored.

What would Mark Twain say about our current bank regulations?

Do you remember Mark Twain’s saying about the banker lending you the umbrella when it shines and taking it away when it rains? Well now thanks to bank regulators the banks are also earning immensely higher risk-adjusted returns on their equity lending the umbrella when it shines than when lending it when it rains. How come? 

Currently, if a bank lends to a small business or an entrepreneurs, those deemed officially as “risky” by the regulators, it is required to have about 8 percent in capital, but, if lending to an officially ex-ante deemed not risky, like the triple-As or the infallible sovereigns, the banks needs to hold very much less capital, sometimes even zero. 

Does this make our banks more productive? Of course not! We risk-adverse citizens, have always been grateful for the service our banks provides the society, channeling our savings to those who can generate economic growth, and decent jobs for our grandchildren… which basically means taking risks on small businesses and entrepreneurs, not lending to what is so “not-risky” it can easily raise funds elsewhere. 

Does this make our banks safer? Of course not! No systemic bank crisis has ever occurred because of excessive exposures to what is ex-ante perceived as risky, these, exactly like the current one, have always resulted because of excessive exposure to what was ex-ante perceived as absolutely not risky, and ex-post turned out to be very risky… often because the safe-havens became dangerously overcrowded. 

And so what would Mark Twain say now? Since after this crisis, that threatens the whole Western World, we insist in using the same failed regulators using the same failed regulatory paradigm, he would just elegantly (through a time machine) defer to Albert Einstein’s "we can't solve problems by using the same kind of thinking we used when we created them" and, of course, “insanity is doing the same thing over and over again and expecting different results”.

A question about the Wolfson Economic Prize

A £250,000 Wolfson Economics Prize competition has now been announced for the best answer to the following question: If member states leave the European Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership? 

And, what if one believes no member state should have to leave the eurozone, because even though the eurozone undoubtedly presents many challenges, this crisis was primarily the result of bad banking regulations, and not of the eurozone? 

Let me explain. The only way the current imbalances could have resulted in building up the humongous European sovereign debt burdens, carried primarily by banks, was that the regulators allowed the banks to hold these exposures against zero or very little equity. This caused the banks to be willing to lend too much, at artificially low interest rates. 

If that is the case, at this moment, when some of the European sovereigns are rated as “riskier”, and therefore banks are required to hold more capital when lending to these, the possibilities are either that these debtors will find it much harder to work themselves out of any excessive debt position, and or, that the remaining safe-sovereign-havens also end up dangerously overcrowded. 

It is bad enough that bankers lent the umbrella to the European sovereigns when the sun was shining and now they want it back when it rains, for the regulators to do exactly the same. 

What solutions do I envision?

Perhaps a general and substantial haircut on all outstanding European sovereign debt, Germany included, which would allow the stronger countries to help out more in getting the eurozone economy going… and, of course, a total reversal, over a period of time, of the current capital requirements for banks based on ex-ante perceived risk of default, and which will go down in history as the mother of all failed and truly stupid bank regulation Maginot lines.

I have now received an answer to my query, it is: “The question stands as framed”

Unfortunately, it seems that the possibility of a solution that does not mean someone being expelled from the eurozone, is not acceptable.

Occupy Wall Street? Occupy RBS? No! Occupy the Basel Committee! Hell, occupy FSA and the Dodd-Frank Act too!

I have not read yet in full FSA’s report on the failure of RBS, but I know what it does not include, the admittance of the fundamental mistake committed by the bank regulators, because that mistake is kept, alive and kicking, in Basel III.

Simplified, if the cost of funds for RBS was 2 percent; if it wanted to earn a 1.5 percent margin; if the cost of analyzing the credit worthiness of a small business in the UK was 1 percent; and if the risk that this borrower would default was perceived as 3 percent, then RBS would charge the small business in the UK an interest of 7.5 percent.

And if the cost of funds for RBS was the same 2 percent; if it wanted to earn the same 1.5 percent margin; if the cost of analyzing the credit worthiness of Greece was zero, because that is paid by Greece to the credit rating agencies to do; and if the risk that Greece would default was perceived as 1 percent, then RBS would charge Greece an interest of 4.5 percent.

If RBS bank was required to have about 8 percent in capital against any loan, and could therefore leverage its capital about 12 times, RBS could then expect to earn 18 percent on its capital when lending to a small business in the UK or when lending to Greece.

But that was before the bank regulators of the Basel Committee, and FSA, intervened and messed it all up.

Because the bank regulators, ignoring the empirical evidence that bank crisis never occur because of excessive exposures to what was considered risky but only because of excessive exposures to what was considered as absolutely not risky, with their Basel II, told RBS: “You RBS, if you lend to a “risky” small business in the UK you must have 8 percent in capital, but, if you lend to an infallible Greece or anyone else similarly risk-free, you only need to have 1.6 percent in capital”.

And because that 1.6 percent allowed for a leverage of more than 60 times when lending to Greece, RBS, though it still could earn a decent 18 percent on its capital when lending to a small business in the UK, suddenly RBS could expect to earn 90 percent on its capital when lending to Greece or similar. Hell, RBS could even afford to lower the interest rate it charged Greece and still earn more when lending to Greece than when lending to a small business in the UK.

And of course RBS, as did all banks in the Western world, started running to the officially perceived safe-havens of Greece, Italy, Spain, triple-A rated securities and other, where they could earn much more on their equity; and of course the governments of the safe-havens could not resist the temptations of cheap and abundant loans, and all these safe-havens became dangerously overcrowded… while the small business in the UK found it harder and much more expensive to access any bank credit… and while the too big to fail banks grew even bigger.

And, many years into a crisis that has the Western World in a freefall, this issue is not even discussed, and the same failed bank regulators are allowed to work on Basel III, using the same failed loony and distorting ex-ante perceived risk of default based capital requirement discrimination principle.

And when Adair Turner, the Chairman of FSA, in the report on the failure of RBS now states “These prudential regulations have been changed radically since the crisis, with the internationally agreed Basel III standards” he is not referring to this problem.

And this problem has been known, for a long time, just as an example the Financial Times published two letters of mine that clearly warned about what was going to happen. In January 2003, “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, in October 2004, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?

And I have even explained much of the problem personally to Lord Adair Turner, quite some time ago.

Occupy Wall Street? Occupy RBS? No! Occupy Basel! Hell, occupy FSA and the Dodd-Frank Act too!

I accuse the bank regulators... they caused the crisis!

If risk models, credit ratings and market intuitions were perfect, then a bank would really not need any capital at all, since all risk considerations would have been correctly priced, in the interest rates, in the amounts and in the duration of the loans. But, since risk-models, credit ratings and market intuitions are often not perfect, the regulators needs to require the banks to hold some capital, to make sure that there is an adequate cushion provided by the shareholders who are profiting from the bank activity, before creditors and tax payers are called upon to help out. 

Unfortunately the current generation of bank regulators, stupidly, did not base their capital requirements for banks on the possibility of mistakes, but on precisely the same risk models, credit ratings and market intuitions… requiring for instance minimal equity when the perceived risk of default of a borrower seemed minimal.

And it is precisely there, where the perceived risks of default seem minimal, where the risks for a systemic bank crisis resides, as what is ex-ante perceived as “risky” does never grow into a dangerously sized exposure.

And so, instead of helping to cushion for the mistakes of the banks, the regulators, with their distortions, increased the probabilities of the mistakes being made, and their negative financial consequences. 

And that they did by allowing banks to hold only 1.6 percent in capital when investing in triple-A rated securities or lending to sovereigns like Greece, which implied an authorized leverage of 62.5 to 1, while at the same time requiring the banks to hold 8 percent in capital when lending to job creating small businesses and entrepreneurs, an authorized leverage of 12.5 to 1. And that they also did by allowing the banks to lend to the “infallible sovereigns” against no capital at all, where not even the sky was the limit on leverage. 

And that is why we got those monstrous large bank exposures to what was ex-ante officially perceived as not risky, and which have now, ex-post, exploded in the whole Western World. 

And that is why the “risky” small businesses and entrepreneurs find access to bank lending so curtailed and expensive.

The bank regulators need to be held fully accountable for what they did, because if we do not get to the bottom of this sad affair, neither won’t we get out of it.

Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Capital Inadequacies: The Dismal Failure of the Basel Bank Capital Standards

Thank you Mark Calabria for the invitation.

And thank you Kevin Dowd for the paper that inspired the conference.

https://www.cato.org/multimedia/events/capital-inadequacies-dismal-failure-basel-bank-capital-standards

My intervention begins on minute 20:30

The lunacy and the obscenity of current bank regulations

If risk models, credit ratings and market intuitions were perfect, then a bank would really not need any capital at all, since all risk considerations would have been correctly priced, in the interest rates, in the amounts and in the duration of the loans. But, since risk-models, credit ratings and market intuitions are often not perfect, the regulators should require the banks to hold some capital, to make sure that there is an adequate cushion provided by the shareholders who are profiting from the bank activity, before creditors and tax payers are called upon to help out.

Unfortunately the Basel Committee generation of bank regulators, did not base their capital requirements for banks on the possibility of mistakes, but on precisely the same risk models, credit ratings and market intuitions… requiring for instance minimal equity when the perceived risk of default of a borrower seemed minimal. In other words instead of helping to cushion for the mistakes the regulators, with their distortions, increased the probabilities of mistakes being made, and their financial consequences.

Also, the obscene bank bonuses, based on obscene bank profits, are more the product of some obscene low capital requirements, than the product of good banking. If you earn an expected margin of 1 percent lending to Greece, and leveraged that on your capital 62 times, as the banks were explicitly authorized to do, then your expected return on that bank equity would be 62 percent a year… who would not lend to Greece?

The bank regulators, who are the ones most responsible for causing the current financial crisis that is menacing the Western World, need to be paraded down Fifth Avenue and Champs-Élysées wearing cones of shame… and to be barred, for life, from all regulatory activity.

We urgently need regulators who also understand that risk-taking by the banks is like oxygen to our economies, and therefore understand the need for not rewarding any excessive risk-adverseness... so as to also avoid, the so dangerous overcrowding of the ex-ante safe havens.

Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

What Niall Ferguson left out

Niall Ferguson in “Civilization: The West and the Rest” argues that the west's ascendancy, is based on six "killer apps": competition, science, democracy, medicine, consumerism and the work ethic. Those are indeed ingredients, but unfortunately he misses the willingness to take risks... the oxygen of development. 

Perhaps he does not remember psalms calling out “God make us daring”… and that is why he fails to understand how the bank regulators, with their stupid nanny-scared capital requirements, based on doubling up the importance of ex-ante perceived credit risks, are now slowly but surely taking the Western World down. 

Ps. Here’s a link to… Who did the eurozone in? http://bit.ly/t3mQe0 and as you will read, it really was the butlers… and here´s also a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

And here a comment added December 28, 2015 

In 1988, Basel I halted the ascendancy of the Western civilization and, in 2004, Basel II provoked its fast descent.

In the preface of the book Ferguson writes:

"It was about the first decade of the twenty-first century, just as it was drawing to a close, that I really got the point: that we are living through the end of 500 years of Western ascendancy”

Not a bad estimate. The ascendance stopped in 1988, with the Basel Accord, Basel I, when regulators introduced risk weighted capital requirements for banks and decided that the risk weight for sovereigns was zero percent while for the private sector 100 percent; and then a truly fast descent began when in 2004, with Basel II, they split up the private sector with risk weights  that ranged from 20 to 150 percent, depended on the credit ratings.

That allowed banks to leverage more with “safe” assets than with risky assets; which meant they could earn higher risk-adjusted returns on safe assets than on risky; which meant they built up excessive exposures to what is perceived or deemed to be safe, and ignored what is perceived as risky, like lending to SMEs and entrepreneurs.

And anyone who understands that risk taking is required to keep the economy moving forward so as not to stall and fall, can understand the sad results of it all.

And that it affects primarily the western civilization, is explained by the fact that it possesses the largest amount of “safe” assets than banks can leverage up on, while holding on to the illusion that all is fine and dandy.

Who did the eurozone in?

There are of course many suspicious characters to blame for the eurozone’s pains, not the least the fact that it was created without any strong fiscal root system.

In November 1998, in an Op-Ed titled “Burning the bridges in Europe”, which title had to do with the fact there no escape-route from the euro had been considered. I also wrote there: “That the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive.”

But, there is one huge piece of evidence that is ignored by most of those trying to explain the current troubles. That evidence is the “risk-weights”, the smoking-gun which we find in the hands of the butlers in charge of regulating the banks, and who have their quarters in the Basel Committee for Banking Supervision. Yes, it was some butlers who did the eurozone in! 

The bank butlers, naturally concerned about the safety of the banks, imposed a basic bank capital requirement of 8 percent; applicable for instance when banks lent to European small unrated businesses. In this case that limited the leverage of bank equity to a reasonable 12.5 times to one. 

But, when banks lent to a sovereign, with credit ratings such as those Greece-Portugal-Italy-Spain had during the buildup of their huge mountains of debt, the bank butlers, because this lending seemed so safe to them, and perhaps because they also wanted to be extra friendly with the governments who appointed them, they applied a “risk-weight” of only 20 percent. And that translated into an amazingly meager capital requirement of 1.6 percent; and which allowed the banks to leverage their capital when lending to the infallible a mind-blowing 62.5 times. 

The result was that if a bank lent to a small business and made a risk-and-cost-adjusted-margin of 1 percent, it could earn 12.5 percent a year, not much to write home about. But, if instead it earned that same risk-and-cost-adjusted-margin lending to a Greece, it could then earn 62.5 percent on your bank equity… and that, as you can understand, is really the stuff of which huge bank bonuses are made of, and also the hormones that cause banks to grow into too-big-to-fail. 

And, as should have been expected, the banks went bananas lending to “safe” sovereigns. With such incentives, who wouldn’t? Just the same way they went bananas buying those AAA rated securities that were collateralized with lousily awarded mortgages to the subprime sector, and to which the bank-regulating-butlers also applied the risk-weight of 20 percent. And of course the governments also went the way of the banana-republics, and borrowed excessively. What politicians could have resisted such temptations? 

And it was these generous financing conditions, and all the ensuing loans, which helped to hide all the misalignments and disequilibrium within the eurozone… until it was too late. 

Now how could these bank-regulating-butlers do a criminally stupid thing like that? The main reasons were: the bank butlers only concerned themselves trying to make the banks safe, and did not care one iota about who the banks were lending to and for what purpose; they ignored that banks were already discriminating based on perceived risks so what they were doing was to impose an additional layer of risk-perception-discrimination; they completely forgot that no bank crisis in history has ever resulted from an excessive exposure to what was considered as “risky”, but that these have always been the consequence of excessive exposures to what, at the moment when the loans were placed on the banks balance sheet, was considered to be absolutely “not-risky”. 

Also, when the bank-regulating-butlers decided to outsource much of the risk-perception function to some few credit-risk-rating-butlers, two additional mistakes were made. First, they completely forgot that what they needed to concern themselves with was not with the credit ratings being right, but with the possibility of these being wrong; and second, that what they needed most needed to look at was not so much the significance of the credit ratings meant, but how the bankers would act and react to these. 

And the consequences of these regulatory failure in the eurozone, are worsening by the day, or by the nanosecond… because these bank capital requirements have the banks jumping from the last ex-ante-officially-perceived-no-risk-sovereign now turned risky, to the next ex-ante-officially-perceived-no-risk-sovereign about-to-turn risky … all while bank equity is going more and more into the red… and becoming more and more scarce. 

What could be done? One solution could be that of declaring a ten year new capital requirement moratorium on all current bank exposures; allowing the banks to run new lending with whatever new capital they can raise, while imposing an equal 8 percent capital requirement on any bank business, no risk-weighting. If there’s an exception, that should be on lending to small businesses and entrepreneurs, in which case they could require, for instance, only 6 percent of capital, because these borrowers do not pose any systemic risk, and also because of: when the going gets to be risky, all of us risk-adverse need the “risky” risk-takers to get going. 

But that requires of course a complete new set of bank-regulating-butlers… as the current should not even be issued any letters of recommendations. Let’s face it, after such a horrendous flop as Basel II, neither Hollywood nor Bollywood, would ever dream of allowing the same producers and directors to do a Basel III, and much less with only small script changes and the same actors.

The saddest part is that many of those in charge of helping Europe to get out of the current mess that they helped to create, might be busying themselves more with dusting off their own fingerprints.

If there is any place that deserves an occupation... that is Basel!

PS. Years later I learned that all this was just so much worse. EU authorities had assigned all eurozone sovereigns’ debts a 0% risk weight, even Greece’s, even if they were all taking on debt denominated in a currency that was not denominated in their own domestic/printable fiat currency. Unbelievable! And then EU authorities put the whole blame for Greece's troubles on Greece and did not even consider paying for the cost of their own mistake. Is that a way to build a union? No way Jose!

The G20 Cannes Action Plan for Growth and Jobs, is just the continuation of sheer bank regulatory lunacy

Basel I, II, II.5, III are almost exclusively based on stimulating the banks to lend to what is ex-ante perceived as “not-risky”, like triple-A rated securities and "infallible sovereigns", precisely the terrains where all systemic bank crisis like the current one occur; and which therefore creates disincentives for bank lending to what is ex-ante perceived as “risky”, like the small businesses and entrepreneurs… those who can provide us with the next generation of jobs. 

Therefore, to include in a statement titled “Action Plan for Growth and Jobs”, “We commit to the full and timely implementation of the financial sector reform agenda agreed up through Seoul, including: implementing Basel II, II.5 and III along the agreed timelines”, is just the continuation of sheer bank regulatory lunacy

What about capital requirements for banks based on job creation ratings?

Basel II distortion and discrimination based on perceived risks

  The Basel II discrimination and distortion by  

Poor "systemic irrelevant financial institutions"

So now except for 29 banks all the rest have de-facto been qualified as systemic irrelevant financial institutions. Is this going to make the lucky few less too-big-to-fail? Against a requirement of only 1 to 2.5 percent in additional equity, to be paid in comfortable installments? They've got to be kidding! 

Please, someone, save us from these regulators who keep digging us deeper and deeper in the hole where they've placed us.

Greece, a great referendum… one more!

Of course the timing is lousy, but I believe the referendum proposed by Greek Prime Minister George Papandreou to be the absolutely correct thing to do… better late than never. The bail-out deal offered to Greece can only be successful if it can count with the legitimacy of the full approval of the Greeks, otherwise not even a 90 percent haircut could be enough. On the contrary, not doing the referendum would, de-facto, mean giving in to those who are opposing the current bail-out agreement. Should they vote yes or no? That is entirely for them to decide.

By the way, I would also like to see a referendum in Greece, and in the rest of Europe, regarding whether to keep in their posts, or fire without any sort of letter of recommendation, all those bank regulators in the Basel Committee who allowed the European banks to lend to a Greece, Italy, Portugal… against only 1.6 percent in capital, meaning authorizing the banks to leverage their equity over 60 times when lending to the politicians of these sovereigns…