FT, the Financial Times of London, is not interested in possibly the greatest financial horror story ever.

Banks are allowed by their regulators to hold much less capital (equity) against assets which are ex ante perceived as absolutely safe, like loans to some sovereigns and to the AAAristocracy, than against assets perceived as “risky”, like loans to small and medium businesses and entrepreneurs.

That translates directly into banks being able to earn a much expected higher risk-adjusted return on its equity when lending to “The Infallible” than when lending to “The Risky”.

And that translates directly into the danger that some of The Infallible might get too much bank credit and as a result run into problems which, if and when this occurs, will catch banks standing there naked, with precious little capital to cover them up with, signifying a huge systemic bank crisis.

And that also translates directly into The Risky getting much less access to bank credit and having to pay much higher margins than what would have been the case in the absence of these regulations, signifying, among other, less job opportunities for our youth.

That very dangerous risk-aversion, or call it exaggerated embracement of safety, which is destabilizing our banks, and threatening the future of economies developed based on risk-taking, could be the greatest financial horror story ever.

Strangely enough, the journalists in the Financial Times of London, and to whom collectively I have written more than a thousand letterson the subject, seem not to be much interested.

I wonder why?

In other words, helped along by FT and other, the Baby Boomers’ après nous le deluge regulatory mentality, has the world consuming its past without creating its future

Will there be a mega bank run January 2015?

On January 1, 2015, the Basel Committee has indicated that banks should report their leverage ratio, not based on risk-weighted assets, but simply on total assets, and as of course, the banks should have done all the time.

And that would mean that a lot of banks which have presented themselves to society with an acceptable 8 /15 to 1 asset to capital ratio will, unless they take precautions, then have show that naked, without risk weighting, their real leverage might well be in the 20/40 to 1 range. 

And that should scare the hell of a market that, day by day, like in Cyprus, is seeing more signs reading “bank creditors, caveat emptor, you won’t be bailed out like before”.

The US banks, thanks to FDIC requiring more capital, are on the way of being able to show the lowest leverages. Most European banks, being more firmly in the hands of the Basel Committee, or vice-versa, seem will not be so lucky.

Go back over the last five years, and you will find innumerable comments, by experts, including regulators, referring to the low leverages of banks, without them having the faintest idea of how the modern Basel II leverages had been construed, and without the faintest idea that current leverages, after risk-weighting, can in no way be compared with the historical leverages based on un-weighted assets. 

At least it looks like the time of funny leverages is soon over.

Comments on Basel Committee's “The regulatory framework: balancing risk sensitivity, simplicity and comparability” of July 8, 2013

Basel Committee for Banking Supervision

Sir,

These are comments made in reference to your July 8, 2013 consultation document “The regulatory framework: balancing risk sensitivity, simplicity and comparability”

I would like to begin by clearly stating that for a long time I have completely objected the capital requirements for banks based on ex ante perceived credit risks. I consider these capital requirements to be totally insane and much responsible for causing the current bank crisis, as well as for impeding us getting out of it.

And to that effect I enclose a short opinion recently published in the Journal of Regulation and Risk - North Asia, Volume V Issue II Summer 2013. The “Mistake” that shall not be named

That said I would also like, just as an example of what I criticize, refer to the following in the document.

“73. For example, in increasing ex ante risk sensitivity and expanding risk coverage, the framework has progressively sought greater alignment of regulatory capital with economic capital. This approach is implicitly premised on the suitability of economic capital as an appropriate measure for regulatory purposes. But the relationship between economic capital and regulatory capital may need reexamination in the light of the recent shift in the focus of regulation and supervision from ensuring the soundness of individual institutions to, additionally, safeguarding the stability of the banking system.”

First, what are you saying? That “safeguarding the stability of the banking system” was not understood to be the role of the Basel Committee for Banking Supervision before? Do those who appointed you really agree with that statement?

Second, your regulatory capital based on ex ante perceived credit risk, even in the case of an individual bank, is an utterly incomplete reflection of economic capital, since it does not consider facts like the size of the exposures, meaning the portfolio diversification/concentration, or the duration of those exposures, for instance the interest rate risk.

And then let me briefly and partially answer some of your specific questions

Q1. Does the current framework, with its reliance on the risk-based capital at its core, appropriately balance the objectives set out in paragraph 29?

No! The core of the current framework, risk-based capital is completely wrong.

For instance, when in 29 you write “These ideas should be assessed against the primary aims of the capital adequacy framework: that is, the capital adequacy framework should…. take into account the effects of capital requirements on banks' risk-taking incentives, eg when faced with regulatory constraints on their capital (and therefore the size of their balance sheet), to seek higher-risk assets as a means of boosting expected returns”, you do not seem to comprehend the real problem.

The fact is that banks, “when faced with regulatory constraints on their capital”, primarily seek assets which have a low capital requirement, in order to boost expected risk-adjusted returns on equity

Q2. Are there other objectives that should be considered in reviewing the international capital adequacy framework?

Yes, like the little matter of the purpose of the banks; like that the capital adequacy framework should not be allowed to distort the bank credit allocation to the real economy. 

Q3. To what extent does the current capital framework strike the right balance between simplicity, comparability and risk sensitivity, given the costs and benefits that greater risk sensitivity brings?

To no degree at all, especially since the “greater risk sensitivity it brings” is only a quite arrogant ex-ante presumption.

Q4. Which of the potential ideas outlined in Section 5 offer the greatest potential benefit in terms of improving the balance between the simplicity, comparability and risk sensitivity of the capital adequacy framework?

In my opinion, a simple leverage ratio of 8 to 10 percent, complemented by a reporting requirement which includes; a report of risk adjusted leverage based on standardized risk-weights, and issued strictly for approximate comparative purposes; and some additional information on its portfolio diversification and duration, and that can be helpful for the market to get a sense of the risk structure of the bank.

The transition to such a reality though would have to be managed with a lot of intelligence in order not to make things worse.

Q5. Are there other ideas and approaches that the Committee should consider?

Yes!

How did Basel I, II and III evolve? How can we make sure that the serious mistakes in them and that I attribute to incestuous group-think within a mutual admiration club, are not repeated?

There is a need for a critical mass of qualified creditors in the market who know they will not be bailed out automatically from a bank problem.

Who authorized the Basel Committee to act as a risk-manager of our banks and the world?

If you want to do it right, you need to work with a whole set of new regulators who have no vested interest in defending what has been done in the past… remember, neither Hollywood nor Bollywood would ever dream of entrusting a Basel III to those responsible for Basel II flop.

Am I to harsh and impolite in my criticism? Considering the suffering and the millions of unemployed youth resulting directly from your faulty regulations, I do not think so.

Sincerely

Per Kurowski

http://subprimeregulations.blogspot.com/

Rockville, Maryland, USA

PS. If you want to download the whole journal from which my opinion was extracted you can go tohttp://www.scribd.com/doc/149858219/Journal-of-Regulation-Risk-North-Asia-Volume-V-Issue-II-Summer-2013

My opinion in The Journal of Regulation and Risk North Asia Volume V Issue II Summer 2013

Here is the link to "The 'Mistake' that dares not to speak its name", my opinion about the Basel Committees' bank regulations.

And here the link where you can download, for free, the whole journal

In it, I would also recommend the articles by Andrew G. Haldane and Thomas M. Hoenig

Mr. President, Mr. Prime Minister. Here is how to best help to create jobs for our youth

Our banks, for reasons that have not been adequately explained, because regulators themselves do not understand these, allow banks to hold much less capital (equity) against exposures perceived ex ante as “absolutely safe”, than against exposures perceived as “risky”.

That allows banks to earn much higher expected risk-adjusted returns on equity when lending to “The Infallible”, like sovereign and the AAAristocracy, than when lending to “The Risky”.

That distorts and makes it impossible for banks allocate economic resources efficiently in the real economy. 

And it also serves no purpose, since all bank crises in history have resulted exclusively from excessive exposures to what was erroneously perceived ex ante as absolutely safe, none from excessive exposures to what was perceived as “risky”.

And that hinders “The Risky”, the small and medium businesses and entrepreneurs, those who could perhaps generate of those jobs our youth urgently need, from having access to bank credit in competitive terms.

And therefore we must urgently eliminate this regulatory discrimination against risk taking. We did not get to where we are by avoiding risks, much the contrary.

In order to do that, the best route includes a mixture of:

Increasing capital requirements for banks, on exposures to “The Infallible”

Temporarily lowering capital requirements for banks, on exposures to “The Risky”

Creating the incentives needed to stimulate and facilitate important capital increases in the banks.

If regulators just cannot resist from interfering, ask these to give banks instead the incentives of lower capital requirements, based on potential-of-job-creation-for-our-youth ratings.

As is, banks do not finance the future they only refinance the past. God make us daring!

Mr. Fed some few questions on Basel III, bank capital, mortgages, jobs, "the absolutely safe", and the "risky"

And so Mr. Fed you will still allow banks to hold less capital against mortgages than against loans to businesses, only because, like the Basel Committee, you feels the former poses less risk for our banks. But frankly, Mr. Fed, long term, for the economy, and for the banks… how safe are houses without jobs?

And Mr. Fed you will equally still allow for capital requirements that are much smaller for exposures to what is considered (ex-ante) absolutely safe, than for exposures considered "risky".

Mr. Fed, could it really be that you do not understand that allowing banks to earn higher expected risk adjusted returns on their equity on assets perceived as “absolutely safe”, than on assets perceived as “risky”, introduces the mother of all distortions, which makes it impossible for banks to allocate resources efficiently in the real economy? 

Mr. Fed could it really be that you do not understand how the previous distortion destroys most of the effects on the real economy your quantitative easing programs could produce? 

Mr. Fed could it really be that you do not understand that the most important factor in keeping the banking system strong and healthy is a strong and healthy real economy?

Mr. Fed could it really be that you do not understand that there are no dangers for the banking system in waters perceived as risky, and that all the dangers to it lie in waters perceived as absolutely safe.

Mr. Fed do you not know Mark Twain said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”?

Is not the interest that is not earned on public debt because of public policies a tax?

In terms of taxation, who is affected by a higher real tax rate?

Someone earning 5 percent in interest on public debt and, supposing a tax rate of 20 percent, then has to pay 1 percent in taxes, resulting in net earnings of 4 percent, or, 

Someone only earning only 3 percent on public debt, because of QEs, lower capital requirements for banks when lending to sovereign, and other fancy stuff causes lower interest rates on public debt.

You tell me, or better yet, tell them!

Three Qs and As on our banks

Q. What is the first worst that can happen to our banks, excessive exposures to the risky?

A. No, the “risky” never poses any risk of excessive exposures, The first worst is when something considered as “absolutely safe”, and to which therefore bank exposures could be huge, blows up in their face.

Q. What is then the second worst?

A. That when the first worst happens, the banks would not have the capital needed to cover for the losses.

Q. But, if then regulators, by setting quite decent capital requirements for banks for holding what is perceived as “risky”, but almost nonexistent for exposures to what is perceived as “absolutely safe”, make it more likely that the first worst and the second worst come together… is that not sort of dumb?

A. Yes, indeed, I take it back. The first worst thing that can happen to our banks, are dumb regulators.

Conclusion: Throw out Basel's capital requirements for banks based on perceived risk and use a simple and straightforward leverage ratio of between 8 and 10%

How dumb can we allow our bank regulators to be?

The Financial Stability Board in its meeting on June 24, 2013 in Basel declared:

“Despite important progress in strengthening the resilience of the global financial system, some parts of the system remain in a state of incomplete repair. Some jurisdictions need to continue to improve the capitalisation of their banking systems.”

But, of course, not a word that it was them, and their chums at the Basel Committee who, with that mother of all bad inventions, namely the capital requirements for banks based on perceived risk, allowed the banks to explode their balance sheets on what was perceived as “absolutely safe” holding almost no capital; and completely ignoring the fact that all major bank crisis, no exclusions, have detonated because of excessive exposures to what was perceived as “absolutely safe”, but turned out not to be.

1.6 percent in capital, a 62.5 to 1 leverage when lending to Greece but 8 percent capital, five times less, a 12.5 to 1 leverage when lending to a German unrated entrepreneur. How dumb is one allowed to be?

These regulators should all be sent home… disgraced... and paraded with a dunce cap, a cone of shame, on their heads.

PS. This was written before I knew that EU authorities had assigned all eurozone sovereigns, including Greece, a 0% risk weight, which meant allowing infinite leverage.

PS. My letter to the Financial Stability Board

But when will Europe debate “Regulatory Abuse of Market Regulation”?

In Europe the European Parliament, and others related, are debating a “Market Abuse Regulation”. That is OK, though I must wonder about when they will begin debating “Regulatory Abuse of Market Regulation”?

Allowing banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”, as Basel II and III regulations do, allow banks to earn much higher expected risk-adjusted return on their equity when lending to the AAAristocracy than when lending for instance to small- and medium-sized enterprises… and that, as anyone should be able to understand, is as abusive to the market as can be!

Ask the regulators!

You tell me, is Mario Draghi being shameless, or is he just ignorant?

In a speech before the French National Assembly in Paris, 26 of June 2013, Mario Draghi, the President of the ECB, said:

“The ECB has been very active in responding to the crisis. We have robustly defended the stability of our monetary union and therefore of our money. And we stand ready to act again when needed.

However, it is important to acknowledge that there are limits to what monetary policy can achieve. This is not a question of the scope of our mandate. It is fundamentally about what different institutions are empowered to do.

One pertinent example is the current shortage of credit for many households and small- and medium-sized enterprises. Credit provision requires funding, capital and a positive risk assessment. The central bank can help ensure funding and address macroeconomic risk. But it cannot provide capital, nor can it affect banks’ assessment of the creditworthiness of individual borrowers.

Similarly, monetary policy cannot create real economic growth. If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix.”

And I repeat: “the current shortage of credit for many households and small- and medium-sized enterprises… The central bank … cannot provide capital, nor can it affect banks’ assessment of the creditworthiness of individual borrowers”

And this is the same Mario Draghi who for many years chaired the Financial Stability Board, that which fully endorsed the Basel bank regulations.

The central bank, though more precisely the regulators, do “not affect banks’ assessment of the creditworthiness of individual borrowers”, but, since they decide how much bank equity goes with each one of those assessments, they decide how much risk-adjusted return on equity banks should expect from each individual borrower. 

And since Basel regulations, allow banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”, the banks earn much higher expected risk-adjusted return on equity when lending to the AAAristocracy, than when lending to the “many households and small- and medium-sized enterprises”

And that constitutes precisely the fundamental cause for “the current shortage of bank credit to many households and small- and medium-sized enterprises”.

And that is so especially now, given the immense bank capital shortage that has resulted from for instance having allowed banks to lend to ("almost infallible") Greece holding only 1.6 percent in capital, something which implies a mindboggling allowed leverage of equity of 62.5 times to 1.

And so, you tell me, is Mario Draghi being shameless, or is he just ignorant?

Why, why, why? What is this Basel Committee bank regulation lunacy?

What if the Department of Education ordered that all teachers who were teaching those perceived as brighter should receive a substantial bonus, not payable to those teaching those perceived as less intelligent?

And I ask that because something like that it is precisely what the bank regulators of the Basel Committee do when they allow banks, doing normal banking business, to earn a much higher risk adjusted return on their equity when lending to “The Infallible”, like to the AAAristocracy, than when lending to “The Risky”, like to small businesses and entrepreneurs. Tell me what lunacy is this?

And I ask that because those regulations translates into “The Infallible” having even more access to bank credit at even lower interest rates, and “The Risky”, having even less access to bank credit at even higher rates.

And I ask that because no major bank crises ever has resulted from excessive exposures to “The Risky” they have all, no exceptions, resulted from excessive exposures to what was erroneously thought as belonging to “The Infallible”.

And I ask that, because our real economy did not get prosperous, nor did we get our jobs when young, by the banks lending solely to “The Infallible”. We need our banks to lend to “The Risky”, with reasoned audacity.

The Basel Committee seems to be drowning in in-house surrealism. Put it out of its misery

Risk weighted capital requirements are insane, since the perceived risks they are based on, are already been cleared for in interest rates, amounts of exposure and other terms. 

And not only am I saying it. Anat Admati and Martin Hellwig recently wrote “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

And now the Basel III reformers are introducing a simple, transparent, non-risk based leverage ratio of 3 percent to act as a credible supplementary measure to the risk-based capital requirements.

And they argue they do that to “reinforce the risk-based requirements with a simple, non-risk-based "backstop" measure.” “reinforce”? They’ve got to be joking. "Supplementary" as they say,  perhaps somewhat, though the fact remains that capital requirements will still be based on perceived risk and therefore still favor “The Infallible” those already favored by banks and markets, and discriminate against “The Risky” those already discriminated against by banks and markets.

And read this! “Implementation of the leverage ratio requirement has begun with bank-level reporting to supervisors of the leverage ratio and its components from 1 January 2013, and will proceed with public disclosure starting 1 January 2015.” And which means that before January 1st 2013 we the public, will not have the right to know how really leveraged our banks are.

The Basel Committee seems to be drowning in in-house surrealism, and some ministers or central bankers should show some mercy and put it out of its misery

Why can´t a sequestration begin cutting where it could be most productive?

G8, for the unemployed young ones sake, please wake up! We do not pray “God make us daring” for nothing.

G8, the world has not reached this far by avoiding taking risks. Current bank regulations which by allowing banks to hold much less equity against assets perceived as “absolutely safe” than against assets perceived as “risky”, allow banks to earn much higher expected risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky. 

That has castrated our banks which makes it impossible for these to allocate economic resources efficiently in the real economy. That dooms our youth to unemployment. Never forget The Infallible of today were The Risky of yesterday.

That does not make our banks safer either, as it only guarantees that any absolutely safe-haven will, sooner or later, become dangerously overpopulated, and then catch our banks with their pants down, meaning with no capital. Just consider how Basel II did Europe in.

G8, please wake up and throw away current bank regulations issued by the Basel Committee. We do not pray “God make us daring” for nothing.

If only Basel Committees’ bank regulations applied to the World Bank.

Then perhaps it would have been easier for the World Bank to understand how flawed these bank regulations, which are basically being imposed on the whole world, really are. 

Can you imagine the Executive Directors having to discuss that one way of reaching capital sufficiency for the bank, so as to satisfy regulators, is to lend more to those countries perceived as ‘infallible” and lend less to those countries perceived as “risky”, because the latter requires the bank to hold much more capital as a percentage… and this even though the “risky”, precisely because they are perceived as “risky”, already receive much smaller loans under much more demanding terms? 

Risk-taking is the oxygen of all development, and the “risky” are usually the actors in the real economy who, living on its margins, most need access to bank credit. In fact no country has been able to develop by means of regulations which would favor “The Infallible, those already favored by banks and markets, and thereby odiously discriminating against “The Risky” those already discriminated by banks and markets. 

And not only that, since no major bank crisis has ever resulted from excessive exposures to "The Risky" but always from excessive exposures to who were wrongly thought as being “The Infallible, the whole regulatory exercise is completely useless. 

That the world’s premier development bank, and which I as a former executive director have learned to admire in so many ways, has not been able to stand up to regulators and speak out in the name of risk-taking and in the name of “The Risky”, is a terrible disappointment to me. 

Much as a result of its silence, regulators around the world are now castrating the banks, making these completely useless in terms of performing their vital social function of allocating financial resources efficiently. 

Also much as a result of its silence, banks around the world are dangerously overpopulating whatever is perceived as a “safe-haven” 

And much as a result of its silence, youth all around the world are suffering from the lack of jobs which have resulted from banks not lending to small, mediums and large businesses and entrepreneurs who do not possess top credit ratings in equitable terms. 

Perhaps the World Bank would benefit from the recommendation Katie Couric says she once received, namely that "A boat is always safe in the harbor, but that's not what boats are built for."

PS. Some in the World Bank are perfectly aware of how much, during my two brief years as an ED, I warned about the crisis that was doomed to happen. And yet, these meek do not dare to officially invite me to the World Bank to expose to a wider audience the fundaments of my criticisms against the pillar, the pride and the joy of the Basel Committee, the risk-weighted capital requirements. 

Davis Polk quite faulty analysis of the Brown-Vitter Bill

Davis Polk when analyzing the Brown-Vitter Bill evidences that they, like most discussants of the issue, have not yet understood the very dangerous implications for the banking system which results from risk-weighing bank assets so as to determine their specific capital requirements for banks. With respect to this they write the following: 

“The Brown-Vitter leverage ratio is too blunt an instrument for prudential financial regulation because it is not capable of distinguishing between risky and non-risky assets, and could result in two banks with vastly different risk profiles holding exactly the same amount of capital. 

By making a leverage ratio the centerpiece of its capital framework, the Brown-Vitter bill represents a deliberate departure from the risk-based capital framework, notwithstanding the fact that the risk-based approach has been endorsed and adopted by all major economies around the world."

Let me explain a couple of real street life facts to these lawyers who have so clearly been captured by some desk illusions. If they then need more they can always go to my blog or call me. 

The perceived risks which are considered for setting the risk-weights are already cleared for by the banks on the assets side of the balance sheet, by means of interest rates (risk-premiums) amount of exposure and other terms. So therefore, forcing the banks to clear for the same perceived risks on the other side of the balance sheet, in their equity, only guarantees banks will overdose on perceived risks. 

When banks are able to hold less equity for “safe” asset than for the “risky” that translates directly into the expected risk adjusted return on bank equity on assets perceived as safe will be much higher than the same expected risk adjusted return on equity on assets perceived as “risky”, something which obviously introduces huge distortions and which make it impossible for the banks to perform their vital social function of allocating resources as efficiently as possible in the economy. 

The following question could also help to shed some light on this issue: “Do you approve that those who by being perceived as “The Infallible” are already much favored, should be additionally favored by the banks, and that those who by being perceived as “The Risky” are already discriminated against, should be additionally discriminated against by the banks?” Davis Polk, how do you think US Congressmen, in “the land of the brave” would respond to that? 

Davis Polk writes: 

“The inherent disadvantage of a leverage ratio such as the one in the Brown-Vitter bill is its inability to distinguish between risky and non-risky assets. Imagine two banks with exactly the same amount of tangible common equity and exactly the same amount of total assets. Bank A’s assets primarily consist of U.S. Treasury bonds backed by the full faith and credit of the U.S. government. Bank B’s assets primarily consist of the junior tranches of commercial real estate securitizations and equity exposures. 

The two banks would have exactly the same leverage ratio under the Brown-Vitter bill, notwithstanding their entirely different risk profiles. In contrast, under a risk-based capital framework, Bank B’s risk-based capital ratio would be lower than Bank A’s risk-based capital ratio, reflecting Bank B’s riskier balance sheet” 

And my question to Davis Polk would be: How do you know for sure Bank B is riskier than Bank A? What if Bank A held some long term U.S Treasury bonds and interest rates increased? Is not the US Government's strength a direct result of the audacity of its risk-taking citizens? 

Davis Polk also writes: 

“The Brown-Vitter rose-colored glasses view of U.S. banking history in the 19th century is contradicted by the facts” 

Well, Davis Polk, if you were to go to history then you would see that all major bank crisis have always been detonated by excessive exposures to what was ex-ante perceived as belonging to “The Infallible”, but turned out ex-post not to be, and never ever by excessive bank exposures to what ex-ante was perceived as part of “The Risky”. And just look at the current crisis… all bank assets that have created problems were those for which regulators allowed low capital requirements. And not a single of all bank exposure to “The Risky” has caused a capital insufficiency to appear. 

No, you in Davis Polk, instead of admiring so much what the Basel Committee has been up to, should really start to question their lack of wisdom. 

In November 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 its collapse” 

And that is precisely what the Basel Committee did when it concocted the risk-weighted capital requirements, and no one questioned it sufficiently on it. Davis Polk, after the 2007-08 shock are you going to help the regulators to set us up for the next one? If we let them it seems it can only get worse, since now with Basel III they also want to add liquidity requirements based fundamentally on the same perceived risks. 

Davis Polk. I know you are lawyers… but do you really believe the US became what it is by having the banks avoiding risks? If the banks do not help society to take the risk it needs for the real economy to move forward, and to create the next generation of jobs our kids and grandchildren will need... who is going to do that? You and me? 

PS. Does this mean that I agree with the entire Brown-Vitter bill and with nothing of what Davis Polk states? Of course not! For instance I believe that capital requirements between 8 and 10 would suffice if we got rid of all of risk weighting? And I also think much thought should be given to how to help banks raise equity fast, so as to get over that problem and not allowing it to be a drag on the economy for years.

PS. Oh I forgot to mention the fact that minuscule capital requirements, resulting from minuscule risk-weights, are the best growth hormones ever for the too-big-to-fail banks.

The Basel Committee violates democracy

Imagine that in the parliament of any European country (or in the US Congress) supposedly to make banks safer, someone proposes the following: 

To allow banks to hold far less capital when lending to "The Infallible" than when lending to “The Risky”; so that they earn a return on equity far higher when they lend to "The Infallible" that when they lend to "The Risky"; so that they lend to "The Infallible" and refrain from lending to "The Risky". 

And then, in the discussion of such a proposal, it is concluded that this would mean that those being perceived as "The Infallible" and who already pay less interest, and who already have more access to credit when compared with that of "The Risky", shall have even more generous access to bank credit. 

And so therefore this would also mean that those being perceived as "The Risky" and who already pay much higher interest, and who already have a much more restricted access to credit when compared with that of "The Infallible", will suffer even more adversities accessing bank credit. 

And in the debate, when asked about who "The Infallible", those favored are, and who "The Risky", those to be so obnoxiously discriminates are, the response is: "The Infallible" are primarily good governments and private borrowers who have a triple-A credit rating, and "The Risky" are primarily all those small, medium and large businesses and entrepreneurs who do not have a credit rating issued by one of the three major rating agencies. 

What possibilities do you believe the previous proposal has to be approved? 

None! They would throw it out faster than fast, and surely its proponent would have to wave goodbye to his political career, as he would be the laughing-stock of the year. 

And especially so when in the discussions it appears that no banking crisis in history has resulted from excessive lending to "The Risky", as these have all resulted from excessive lending to who were considered members of “The Infallible", but were not. 

And especially so when you hear the question: "If banks will not finance " The Risky", those who perhaps most can generate the new sources of employments our youth craves for and needs ... who the hell will finance then? You and me?” 

And especially so when you hear the opinion: "The signaling of some bureaucrats intervening the signals of the market, sounds to me a recipe for making banking much more insecure than it currently is". 

But the sad fact is that these banking regulations exist and are called Basel II and are already applied throughout Europe. 

According to Basel II, a Spanish bank, for example, must maintain 8 percent in capital when lending to a "risky" Spanish businessman, but was required to hold only 1.6 percent in capital when lending to Greece, or even zero capital when lending to its own government, or for example to the government of Germany. 

And therefore citizens, I suggest you find out where on earth did the Basel Committee get the authority to impose something of such fundamental importance, something which all your respective parliaments would never have approved of. It seems to me that it completely violates the procedures of a democracy.

El Universal

The Shadow Financial Regulatory Committee seems composed by besserwissers who do not know what they are talking about

The Shadow Financial Regulatory Committee, a group of academic critics of federal financial regulatory policies met on December 10, 2012, and elaborated on its critique of Dodd-Frank as “not accounting properly for the risks and costs of the programs and for reinforcing incentives to engage in risky activity that increases the risk of future bailouts”.

These besserwissers have no idea of what they are talking about. The current incentives, much lower capital requirements for banks when lending to "The Infallible" than when lending to "The Risky" are all aligned towards making the banks engage in what is perceived as absolutely safe activities… and which of course, by handing out incentives that will sooner or later lead to a dangerous overpopulation of the safe-havens, increases dramatically the risk of future bailouts. 

Now they have a meeting on May 13, 2013, and I sure hope and pray, they have learnt something in the interim.

Professor Alan S Blinder. If you listen carefully enough, you will notice the music hasn´t stopped.

Professor Alan S. Blinder in his book “After the music stopped” 2013, discusses the origins of the recent bank crisis. In it he lists as “the malevolent seven” the following factors as the villains that conspired to create the recent financial crisis. (Page 28)

1. inflated asset prices, especially of houses but also of certain securities; 

2. excessive leverage throughout the financial system and the economy; 

3. lax financial regulation both in terms of what was left unregulated and how poorly the various regulators performed their duties; 

4. disgraceful banking practices in subprime and other mortgage lending; 

5. the crazy-quilt of unregulated securities and derivatives that were built on these bad mortgages; 6. The abysmal performance of the statistical rating agencies, which helped the crazy-quilt get stitch together; and 

7. the perverse compensation system in many financial institutions that created powerful incentives to go for broke. 

These are no doubt malevolent villains, but Professor Blinder misses what really helped to insufflate so much life into these: 

In chapter 10 Professor Blinder writes: “A bank that earns1 percent profit on assets will earn a 15 percent return in capital, if it is leveraged 15 to 1. But if its leverage drops to 10 to 1, that same 1 percent return on asset will translate to only a 10 percent return on capital. If a bank is forced to hold larger volumes of highly liquid assets like Treasury bills, its average return on assets will decline. This is just arithmetic.” 

That is indeed correct arithmetic, but, unfortunately, as currently regulated, it does not apply to banking. This is so because regulators have imposed a system of different capital requirements based on “perceived risk”, and mostly as perceived by the credit rating agencies. 

These capital requirements allow banks to hold much lower capital against exposures to what is perceived as “absolutely safe” than for exposures perceived as “risky”. Just as an example, a German bank, to which after June 2004 Basel II applied, needed, and needs, to hold 8 percent in capital when lending to for instance a small German business, signifying a leverage of 12.5 to 1, but if buying a triple A rated security, like those collateralized by lousy awarded mortgages to the subprime sector, then it only needed, and needs, to hold 1.6 percent in capital, signifying a mindboggling authorized leverage of 62.5 to 1. Fifty times more! 

In fact the advantages that these capital requirements gave anything officially perceived as “safe” suddenly signified that the expected risk-adjusted returns on equity when lending to The Infallible became much larger than when lending to The Risky. 

That the US had not yet fully implemented Basel II is somewhat irrelevant. The US had committed to do so, and in fact SEC in April of 2004 had already approved that these capital requirements were going to apply for the investment banks they supervised. 

As Professor Blinder should be able to understand this senseless regulations introduced huge distortions into the banking system. Since those distortions are far from over, and could in fact become even worse with the introduction of liquidity requirements which are also much based on perceived risk, he might also understand that in reality, the very bad music, hasn’t stopped. 

“Did Bear Sterns, Lehman Brothers and AIG founder over insolvency or illiquidity?” asks Professor Blinder. He advances that is “Not easy to answer”. I have no doubt though. It was an insolvency which resulted from bad incentives and which led banks to dangerously overpopulate safe-havens. 

AIG, as an example, would not have been able to sell a fraction of the credit default swaps they sold had it not been for the fact that since AIG was rated AAA, the purchase of such a CDS immediately allowed the banks to reduce the capital they needed to hold against the exposure being insured.

Are bank regulators violating the human rights of the next generations?

The current capital requirements for banks in Basel II, which are based on perceived risks already previously cleared for, are immensely lower for exposures to “The Infallible”, like to some favored sovereigns and the AAA rated, than for exposures to “The Risky”, like to small and medium businesses and entrepreneurs. And therefore, banks earn immensely more expected risk-adjusted returns on equity when lending to “The Infallible”, than when lending to “The Risky”. 

And that in essence means that banks are following lending and investment objectives much more suitable to retiring baby-boomers, those who adore safety and cash liquid values, than those of the many young, who need much more daring long-term risk-taking... in order to stand a chance to find a job...during their lifetime. 

And nobody even wants to discuss that distortion, not even the World Bank, the world´s premier development bank. 

And as a result, the gap between the haves, the old, the history, the developed, “The Infallible” and the have-nots, the young, the future, the not developed, “The Risky”, is also increasing. 

Damn those aprės nous le déluge regulators. They castrated our banks and made these abandon our young ones. With what authority do they think they can do a thing like that? 

And, forgive me for asking, but is not a discrimination against the needs of the next generations, in all essence some sort of violation of human rights? And of course one thing is for the regulators to do so unwittingly... but persisting in it even after someone has explained it to them?

Should we not haul the Basel Committee and Financial Stability Board in front of the International Criminal Court in Hague, so as to at least demand the immediate suspension of this odious regulatory policy?