How come XXX, who graduated as a financial expert from YYY, did not know this?

Anyone with some basic financial knowledge must know that banks allocate their portfolio to what produces them the highest risk-adjusted return on their equity; and that constitutes in its turn the best possible (or least bad) way of allocating bank resources to the real economy.

What I cannot for my life figure out is how come a financial professional does not understand that if bank regulators allow banks to hold much less shareholder’s capital against some assets, for instance those perceived as “safe”, than against other assets, for instance those perceived as “risky”, then the banks will earn higher risk adjusted returns on “safe” assets than on “risky” assets, which will distort the allocation of bank credit, and guarantee that the banks will hold too much “safe” assets and too little “risky” assets.

And of course when banks hold “too much” of a “safe” asset, then that asset could turn into a very risky asset for the banks. This is by the way something empirically well established. Never ever has a major bank crisis resulted from excessive exposures to what was perceived ex ante as “risky”, these have all, no exceptions, resulted from excessive exposures to what was ex ante, erroneously perceived as safe... like AAA-rated securities, Greece, etc.

And of course holding “too little” of the “risky” assets, like of loans to medium and small businesses, entrepreneurs and start ups, is very bad for the real economy which thrives on risk-taking, and is therefore, in the medium term, something also very risky for the banks.

How come all those reputable tenured finance professors in so reputable universities did not care one iota about the allocation of bank credit in the real economy was being so completely distorted by the risk-weighted capital requirements for banks? 

When stress testing banks in Europe, what is not on the balance sheets, is more important than what is on!

When managing risks, before discussing risk avoidance, one need to establish very clearly what risks one cannot afford not to take.

And, in bank supervision, a risk one cannot afford to take is that of banks allocating credit inefficiently to the real economy.

But since our current crop of bank regulators never ever asked themselves what the purpose of our banks was before regulating these, they never thought about that.

And so they allowed banks to hold much less capital when lending to “the safe”, like to sovereigns”, to the AAAristocracy or to the housing sector, than when lending to “the risky” job creating medium and small businesses, entrepreneurs and start ups.

And that meant banks earn much higher risk adjusted returns on equity when lending to “the safe” than when lending to “the risky”.

And that means the banks do not lend anymore to the “risky”… especially now when the banks are suffering from too little capital… the result of lending too much against too little capital to some “safe” who turned out risky, like Greece.

And that means the real economy is suffering… and our unemployed youth is running the very clear and present danger of becoming a lost generation-

And so when stress testing banks regulators should look at what is not on the balance sheets, which causes real stress in the economy… and so that they better understand what they did and why they should be ashamed of themselves.

By the way, Timothy F. Geithner’s recent book “Stress Test” completely ignores this distortion, which comes to show how little they understood and how little they still understand of what is going on.

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

PS. The ECB released a detailed description of the Comprehensive Assessment and, of course it is not comprehensive enough to include what I here have referred to.

PS. The most adverse, the truly frightening scenario, which will NOT be stress tested for, is the what happens if bank regulators keep on distorting the allocation of bank credit as they do now.

When are small businesses going to ask regulators why banks need to hold more capital when lending to them?

Read Fed’s Chair Janet L. Yellen’s speech “Small Businesses and the Recovery” delivered at the National Small Business Week Event, U.S. Chamber of Commerce, Washington, D.C. on May 15, 2014

And then reflect that even though never ever has a bank crisis detonated because of excessive bank exposures to “risky” small businesses, nevertheless the regulators require the banks to hold much more capital when lending to them than when lending to the “infallible sovereign” the AAAristocracy or the housing sector.

And that means that banks can obtain much higher risk-adjusted returns on equity when lending to the “infallible sovereign”, the AAAristocracy or the housing sector, than what they can obtain lending to “risky” small businesses.

And that means that small businesses will have access to less bank credit, or to more expensive bank credit, only in order to make up for this competitive disadvantage imposed by regulators.

When are the “risky” medium and small businesses, entrepreneurs and start-ups ask for the why of this regulatory nonsense?

Young unemployed Europeans, you cannot afford having Mario Draghi, Mark Carney and Stefan Ingves hanging around.

Mario Draghi is the former chairman of the Financial Stability Board (FSB) and the current President of the European Central Bank, ECB.

Mark Carney is the current governor of the Bank of England and the current Chairman of the Financial Stability Board.

Stefan Ingves is the current Governor of Sveriges Riksbank, the Swedish Central Bank, and the Chairman of the Basel Committee for Banking Supervision.

These three gentlemen all believe that what is really risky is what is perceived ex ante as risky, which is something like believing the sun revolves around the earth... because any correct reading of financial history would make it clear that what is really risky ex post, is what is ex ante perceived as absolutely safe.

And that is why they have approved of risk weighted capital requirements for banks which allow banks to have much much less capital when lending to “The infallible”, like to sovereigns, the AAAristocracy or the housing sector, than when lending to “The Risky”, like to medium and small businesses, to entrepreneurs and start ups.

And that is why banks can earn much much higher risk adjusted returns when lending to “The Infallible” than when lending to “The Risky”.

And that is why banks cannot allocate bank credit efficiently to the real economy.

And that is why so many young Europeans are out of jobs and without real prospects of being able to land themselves some decent jobs, in their lifetime.

And that is why you must, urgently, let the Copernicus', the Galileo's, and the Kepler’s of financial regulations in.

Those who before they start avoiding risks might have asked themselves: "What risk is it that we can the least risk our banks not to take?"; and have answered that with…“the risk that banks do not lend to the risky medium and small businesses, to entrepreneurs and start ups... those who most need bank credit... those who are best positioned to find the luck we need to move forward”

Young of Europe... if you do not rock this regulatory boat you're lost! 

Holy moly! I always suspected bank regulators regulated from an ideological position, but I had never heard such a confession.

I arrived to Washington in November 2002 to take up a two year position, until October 2004, as one of 24 Executive Directors at the World Bank.

I was then already warning about the distortions that capital requirements for banks based on perceived risks would cause in the allocation of credit to the real economy… and already predicting that it all had to end with a big AAA-Bang.

As an example in November 2004, in a letter published by the Financial Times I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits."

That because already in 1988 with Basel I the Basel Accord regulators gamed the equity requirements for banks in favor of the sovereigns, meaning the governments, meaning their bosses. This they did by allowing banks to hold much less equity against loans to the infallible sovereigns than against loans to the risky citizens.

But over the years in hundred of conferences, I never got anyone reasonably high up to explain the why they did it… that is, until May 1 2014, at Brookings Institute, during a presentation of Jean Pisani-Ferry’s book “The Euro crisis and its aftermath”, Jörg Decressin, a deputy director in the IMF’s European Department, a former deputy director of IMF's Research Department gave me a very straightforward answer… bless him. 

I could not believe what I heard… and neither will you.

My question: (audio 58.30-59.30)

"I am Per Kurowski, a Polish citizen, A European, at least since last Monday, since I suffered a little intermezzo due to a minor problem with the translation of my birth certificate (from Venezuela).

In Sweden we heard in churches psalms that prayed for “God make us daring!” And risk-taking is definitive something that has made and created Europe.

But in June 2002 the Basel Committee introduced capital requirements which really subsidized risk aversion, and taxed risk-taking. For instance a German bank when lending to a German business man need to hold 8 percent in capital but if they lent to Greece they needed zero. 

And those capital requirements distorted the allocation of bank credit in the whole Europe. That is not mentioned in the book. Would you care to comment?"

Decressin’s answer: (audio 1.03.50 – 1.05.37) 

"The capital requirements taxing entrepreneurs… 8% on entrepreneurs, 0% on governments

You raise a very good question and an answer to this revolves around: 

Do you believe that governments have a stabilizing function in the economy? Do you believe that government is fundamentally something good to have around?

If that is what you believe then it does not make sense necessarily to ask for capital requirements on purchases of government debt, because you believe that the government in the end has to have the ability to act as a stabilizer, when the private sector is taking flight from risk, that is when the government has to be able to step in and the last thing we want is then for people also to dump government debt and basically I do not know what they would do, basically buy gold. 

If on the other hand your view is that the government is the problem then you would want a capital requirement, so it depends on where you stand 

I think the issue of the governments being the problem was very much a story of the 1970s and to some extent the 1980s. The problems we are dealing with now are more problems in the private sector, we are dealing with excesses in private lending and borrowing and it proves very hard for us to get a handle on this. We have hopes for macro prudential instruments but they are untested, and only the future will show how we deal with them when new credit booms evolve.”

Jean Pisani-Ferry… agreed and left it at that. 

Holy Moly! I always suspected it, but I never believed I would be able to extract a confession from regulators that they really are regulating from an ideological position!!!

And sadly I had no chance to ask back: Are you Mr. Decressin arguing that we must help government borrowings ex ante, so that government can better help us ex post? As I see it then, when we might really need the government, it will not be able to help us out because by then it would itself already have too much debt… like Greece.

In short, the structural reform most needed to make Europe grow, is to throw out the bank regulators and their risk aversion, and their pro-government and anti-citizens ideology!

The audio: http://www.brookings.edu/events/2014/05/01-european-crisis-aftermath#

Who authorized the regulators to apply their ideology when regulating banks?

How does this square with the frequent accusations of IMF representing the extreme neo-liberalism?

Am I new to the problems of the euro and the eurozone? Judge yourself!

PS. Jean Pisany-Ferry's completely ignored this problem in his book. The approval in June of 2004 of Basel II, is not even listed among the 119 dates and events presented in the “Euro crisis timeline”. A timeline which begins in February 1992 with the signing of the Maastricht Treaty and ends on December 18, 2014, with the European Council reaching an agreement on the Single Resolution Mechanism.

Bank of England keeps mum about its shady distortions of the allocation of bank credit to the real economy.

View the episode of the splendid educational video produced by the Bank of England.

There you will see that at no moment does BoE indicates that it, like their colleagues in other places, require banks to hold different amounts of shareholder´s capital against different assets, and therefore allow banks to obtain different returns on equity for different assets, and therefore distort the allocation of bank credit in the real economy… with disastrous medium and long term results, even for the banks.

Why could that be? Does BoE not know it distorts, or does it have a bad conscience about it? Who knows, it does not really matter. The pain for a medium and small businesses, entrepreneur or start-up, "the risky", of  not gaining access to bank credit or having to pay more for it, is the same.

If I knew absolutely nothing about bank regulations, I might also think like Thomas Piketty does in his "Capital in the Twenty-First Century"

What are the dynamics that drive the accumulation and distribution of capital? Asks the inside cover of Thomas Piketty’s “Capital”. And since just reading from the index shows that Piketty knows nothing about the earth shattering effect of silly bank regulations, or considers the effect of protections derived from intellectual property right, patents, and extravagant market shares, the question will, unfortunately, not be answered in this book.

Currently banks by means of lower capital requirements for what is perceived as “absolutely safe” than for what is perceived as “risky”, allow banks to earn much higher risk-adjusted returns on equity when lending to the safe than when lending to the risky… and anyone who knows how important risk taking is for keeping the real economy moving forward, will know how crazy that is… just like everyone who knows that all major bank crisis have always resulted from excessive exposures to what was perceived as “absolutely safe” and never ever for excessive exposures to what was perceived as “risky” will know, twice, how crazy that is.

To top it up, any book that proposes a tax on the 1% wealthy, without exploring why Chrystia Freeland’s .01% Plutocrats became especially wealthy, risks being a Trojan horse for these Plutocrats to accumulate even a bigger share of the wealth.

And so, I am sorry, “Capital in the Twenty-First Century” does not seem to me to stand on sufficiently stable ground.

And by the way, since the 1% wealthy have most of their fortunes in assets it is not clear how the sale of those assets are going to turn into a higher purchasing capacity of the poor, and if by luck that happens, how the poor are going to be able, avoiding the dilution by inflation, to satisfy their new needs at the grocery store.

Also, currently profits derived from intellectual property rights, like patents, and from extravagant market shares, are taxed at exactly the same rate as those profits derived from competing naked, with no protections, in the market. And since protected profits will always be higher than the unprotected ones, this means the protected will take over the unprotected… with dire results for western world capitalism, as we knew it.

PS. Walking around the museum Louvre in Paris, looking at all that art financed by the super wealthy and powerful, I stopped and asked myself: What would Thomas Piketty’s France exhibit at Louvre had there not been rampant wealth inequality? I mean I saw almost nothing an equal society in need of rational investments, would have been willing to finance. Life is not that clear-cut eh?

Could Thomas Piketty´s tax on 1% wealth, be a Trojan horse for Chrystia Freeland’s 0.01% Plutocrats to capture more wealth?

Today I heard at the World Bank Chrystia Freeland speak about her book “Plutocrats”... that I am now reading.

I asked her two question and some other remained unasked

First: Does the book analyze in any sort of depth, how much of Plutocrats wealth accumulation can be explained by intellectual property rights, patents? I ask this because I have argued that it is not good for capitalism, that the usually ample profits obtained under the protection of a patent (or the power of an extravagant market share) should be taxed at the same rate, than those more meager profits allowed by having to compete naked and unprotected in the market. And so the capital accumulation of “the protected” will be higher than that of “the unprotected”… with dire results in the long term.

Second: Since wealth accumulation by the Plutocrats are so often traced to market anomalies, known as rent-seeking and crony relations, could Thomas Piketty´s tax on the wealthy 1%, which he proposes in "Capital", be a Trojan horse for your 0.01% Plutocrats to increase the size of the cake that they are masters capturing?

One questions I did not have time to ask is… if you actually go after the wealth of the 1%, or even better that of the 0.01%, what would happen to their assets… who would be able to buy these? What would happen to the value of a $500 million Picasso? If it is the government, for instance by printing money, then we should be real careful because, as a Venezuelan, a country where 98% of all its exports goes straight into government coffers, I can guarantee you that government Plutocrats are much worse than the private Plutocrats who, at least for the time being, do not control all other powers.

The other question… or comment, will come later, in due time…because there is much which I do not agree with, in Freeland’s chapter on “Rent-seeking on Wall Street and in The City” and about which she already knows some. Basically it has to do with my vehement objection to the fact, so much ignored, that bank regulator’s pathological risk aversion, had them allowing banks to earn higher risk-adjusted returns on equity when lending to “the safe” than when lending to “the risky”. 

I do agree with her though that the Canadian bank regulator showed himself to be much wiser, by setting the capital requirements for banks more based on “the unexpected” than on “the expected”… that risk which should be taken care of directly by the banks.

PS. What a coincidence! Chrystia Freeland is the representative in the Canadian Parliament of where my Canadian grandchild lives. I informed Freeland that when my grandchild reached voting age, she could try to get her vote… and I would not object. Meanwhile, hands off, she is my constituency.

There is, might really be unwittingly, a high treason going on, against the western world, against the Judeo Christian civilization.

I was born a coward. Or at least quite risk adverse. And the many risk I have taken, is mostly because of blissful ignorance, or a glass of wine too much.

But I have always known about the importance of risk-taking, which is why I have always been grateful that my world was able to ride on the coattails of daring risk-takers; and that is why I often complained that Mark Twain was too right when he, supposedly, described bankers as those who lend you the umbrella when the sun is out, and want it back as soon as it seems it is going to rain.

But then came some bank regulators and really messed it up. Even more wimpy than I, they decided banks could hold less capital when lending to what was perceived as safe than when lending to what was perceived as risky, which meant banks would be able to earn much higher risk-adjusted returns on what was perceived as “safe” than on what was perceived as ”risky”. 

And, of course, that meant banks stopped giving credits in competitive risk-adjusted terms to the medium and small businesses, entrepreneurs and start-ups, to those that keep our bicycle moving forward, not stalling, not falling.

And now I fret for my daughters, and I fret even more for my grandchild, soon grandchildren, because I know that if my western world, my Judeo-Christian civilization, stays in the hands of adversaries to risk taking, it will just go down, down, down.

Regulators, if you really must distort, why not do it for a purpose in mind? Why not use, instead of credit ratings, job for our youth ratings?

Mamma Mia!

You the young in Europe, you don’t find jobs? Thank your sissy bank regulators for that!

You the young in Europe, especially you the unemployed, listen up!

Your bank regulators set up a system by which they allowed the banks to earn much higher risk adjusted returns on equity for what was considered safe, like AAA rated securities, real estate in Spain and lending to Greece… something which the banks liked very much, and therefore they lent too much, like to AAA rated securities, real estate in Spain and Greece, and which you all know by now caused the mother of all disasters.

And as a result of the same system your banks earn much less risk adjusted return on equity when lending to the “risky” medium and small businesses, entrepreneurs and start-ups, and so the banks, naturally, do not lend to those who could perhaps most provide you with the next generation of decent jobs.

And so, if you occupy Basel, in order to protest the Basel Committee, let me assure you that you have my deepest sympathy, and my full understanding… Good luck! You need it, the baby-boomers have much power. 

Per Kurowski

Do you hold any views on the issue of risk aversion vs. willingness to take risks in the Judeo-Christian tradition?

Current bank regulators, by allowing banks to hold much less capital (equity) when lending to someone perceived as “safe” than when lending to someone perceived as “risky”, have caused the banks to earn much higher risk adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.

This, as I see it has introduced a serious risk aversion, or an unwillingness to take the risk which constitutes the oxygen of development, and that is very dangerous to the western world… where in its churches we used to sing “God make us daring”.

Are there any historians out there who have special knowledge on the issue of risk aversion vs. willingness to take risks in the Judeo-Christian tradition?

Please?… perkurowski@gmail.com

Why do the Basel Committee, the Financial Stability Board and the IMF not understand what any normal parent does?

If children were rewarded with ice cream for eating cookies, and punished with spinach for eating broccoli, chances are too many kids would turn out to be obese… and almost anyone would understand and know that.

And so why does the Basel Committee, the Financial Stability Board and the IMF not understand that, if you reward bankers with allowing them to hold less capital when lending to “the infallible”, so that they can earn higher risk adjusted returns on equity; and punish the bankers with having to hold more capital when lending to “the risky”, to make it harder for the banks to earn sufficiently high risk-adjusted return on equity, then banks will lend much too much to “the safe” and much too little to “the risky”… and a crisis in the banking system and in the real economy will ensue.

IMF, where have you been since the financial crisis broke out in 2007?

In January 2003, while being an Executive Director at the World Bank, in a letter published by FT, I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

And as predicted, with the help of the capital requirements for banks much based on credit ratings concocted by the Basel Committee in Basel II, the rating error of the AAA rated securities backed with mortgages to the subprime sector in the US, was propagated into trillions of dollars in exposures, even in faraway Europe.

And now, soon seven years after the outbreak of the crisis, we read a compendium of articles published by the International Monetary Fund, under the not so humble title of “Financial Crises: Causes, Consequences, and Policy Responses”, and in which we do not find one single reference to the risk-weighted capital requirements.

There is one reference though to credit ratings: “Credit ratings also deteriorate notably before a default, and improve only slowly in the aftermath of debt restructuring”. But that reference, if anything, makes it even clearer why the IMF should be opposed to the risk weighted capital requirements.

Also, in the World Economic Outlook, April 2004, that has a chapter titled “Perspectives on Global Real Interests, we do not find one single reference, or adjustment to the fact that allowing banks to hold sovereign debt, at least that of “the infallible”, against no capital, translates effectively into a subsidy of public debt, and which makes historical comparisons of rates not longer really valid.

And the Global Financial Stability Report, April 2014, also clearly evidences IMF has still not understood how the risk-weighted capital requirements for banks not only distorts the allocation of bank credit but also, by amplifying the effect of any insufficient perception of risk, becomes one of the most important sources of instability in our financial system.

If the Basel Committee had had anything to do with it we, the Western World, would not be cycling.

If the largest of the apprehensions of our mother and of our grandmother about cycling had determined our bicycling, we would still be cycling.

But, if the apprehensions of our mother and our grandmother about cycling had been added up, we would not been cycling.

And that is another way to explain how, when our bankers apprehensions about lending to “the risky”, those reflected in higher interest rates, smaller loans and tighter conditions, got added up to our bank regulator’s apprehensions about risks, those reflected in the capital requirements... it all resulted in our banks not lending to “the risky”, like to the medium and small businesses, entrepreneurs and start-ups.

We need to stress test our bank regulators too! How? Analyze what assets banks do now not have on their balance sheets... thanks to the regulators' interfering and arrogantly playing risk managers for the world

God save us from these regulators.... God please make us daring!

CFPB concern yourselves more with why Payday borrowers need to borrow, than with the conditions and the rates they borrow at

Yes, the Payday borrowers borrow too expensively, but… the other side of that coin is that medium and small businesses, entrepreneurs and startups, those who most could give the Payday borrowers an opportunity of not having to borrow, borrow less, and at higher risk-adjusted rates, than the “infallible sovereigns” and the AAAristocracy… thanks to the colleagues of CFPB… the regulators 

I just wish that CFPB would dare to look into the odious discrimination and odious distortion in the allocation of bank credit to the real economy that the risk-based capital requirements for banks cause.

The world needs regular jobs, not just jobs for bank regulators.

With their distortions of the allocation of bank credit to the real economy, which their Basel II risk-based capital requirements cause, has turned the regulators into the worst enemy of the creation of the jobs our young ones need, in order not to become a lost generation.

But it is just getting worse. Every clause I read of Basel III or Dodd Frank Act, or all thereto referenced regulations, ticks off in my mind a calculation of how many more jobs will this mean for regulators and aspiring regulators, and how many more opportunities of regular jobs will be lost because of it. 

And the ratio that keeps popping up in my mind is about 10.000 regular jobs lost for each job created for a regulator or for a bank regulation consultant.

The tyranny of [bank regulatory] experts. The forgotten rights of “the risky” to access bank credit.

Bank regulatory experts in the Basel Committee, and the Financial Stability Board, with their risk based capital requirements, by allowing banks to earn much higher risk adjusted returns on equity when lending to “The Infallible”, are blocking the access of “The Risky” to bank credit.

With that these tyrants are killing our economies… Who authorized them to such odious and senseless discrimination? Did we not become what we are because of risk taking? 

World Bank, IMF what’s wrong with you? You must know this is not right.

Note: Inspired by William Easterly’s “The Tyranny of experts”

European Union, ask the Basel Committee about regulatory distortions in the allocation of bank credit to the real economy

Regulation (EU) No 575/2013 dictated by The European Parliament concerning Prudential Requirements for Credit Institutions and Investment Firms establishes:

“44. Small and medium-sized enterprises (SMEs) are one of the pillars of the Union economy given their fundamental role in creating economic growth and providing employment. The recovery and future growth of the Union economy depends largely on the availability of capital and funding to SMEs established in the Union to carry out the necessary investments to adopt new technologies and equipment to increase their competitiveness. The limited amount of alternative sources of funding has made SMEs established in the Union even more sensitive to the impact of the banking crisis. It is therefore important to fill the existing funding gap for SMEs and ensure an appropriate flow of bank credit to SMEs in the current context. Capital charges for exposures to SMEs should be reduced through the application of a supporting factor equal to 0,7619 to allow credit institutions to increase lending to SMEs. To achieve this objective, credit institutions should effectively use the capital relief produced through the application of the supporting factor for the exclusive purpose of providing an adequate flow of credit to SMEs established in the Union.”

Favoring bank lending to the SMEs this way, implies that the European Parliament admits that the risk weighted capital requirements for banks distort the allocation of bank credit to the real economy. The question then is why has not the European Union, the European Parliament, formally asked the Basel Committee on Banking Supervision, about the implications of such distortions. Is that issue not of utmost importance? Have they, when regulating, not given any considerations to the purpose of banks?

And by the way where did the European Parliament get 0,7619 from? And by the way that still equates to an effective risk weight that is 3 times higher than that applicable to any AAA rated company which might be taking a bank loan only to repurchase its own shares.

And if this is the way to go would the European Union consider to design a similar “supporting factor” for any bank lending which promotes the sustainability of planet earth?

Basel III, risk based capital requirements, leverage ratio, distortions, and “The Drowning Pool”

I have for years seriously criticized the distortions in the allocation of bank credit to the real economy that the risk based capital requirements of Basel II produce. And now I am often being answered that these distortions have been in much removed because of the introduction in Basel III of the 3 percent leverage ratio, that which is applied on all assets without any risk weighing.

Unfortunately the truth is that could make the distortions even worse, and equally unfortunate, the why of it, is not so easy to explain… and so here I give it another go.

Have you seen “The Drowning Pool”, where Paul Newman and Gail Strickland are locked in a hydrotherapy room, with the water rising to the ceiling? Well think of the capital requirements as the hydrotherapy room, and the leverage ratio as the water level. 

In Basel II, there was a lot of room for banks maneuvering around the risk-weights but, in Basel III, by means of the water level having risen, there is now less room-oxygen for the banks to breathe… and so the more the distortion.

And so Basel III by making the search for breathing space harder will therefore make banks even more loath to give credit to “the risky” those which regulators decided consume more oxygen-capital. Get it?

And of course that is not helped by the fact that, with the introduction of liquidity requirements which is also based on ex ante perceptions of risks, new sources of distortion are being introduced.

We must stop bank regulators from increasing the risks of our banking system… they´ve done enough damage as is.

The real risks for a bank regulator, and ours as well, has nothing to do with one or even a couple of banks going busts; it has all to do with the whole banking system melting down, or not doing well what it is supposed to do, namely to allocate bank credit efficiently in the real economy.

And that translates into that the risk of a bank regulator has little to do with the type of assets a bank holds, and a lot to do with the capacity of bankers to pick the assets the banks should hold.

But current bank regulators, with their risk based capital requirements, allow banks to hold extremely large amounts of assets against extremely little capital only because bankers, and sometimes regulators themselves, say they perceive these as being “absolutely safe”. And that allows banks to earn much higher risk adjusted returns on equity when lending to for instance the “infallible sovereigns”, the housing sector and the AAAristocracy, than when lending to the “risky” medium and small businesses, entrepreneurs and start-ups.

And that means, effectively, that regulators are assisting banks to create that kind of excessive exposures to what is perceived as “absolutely safe” which has been the source of all bank system crisis when these, surprisingly, turn out to be risky. And all this is worsened by the fact that when now one of these safe exposures blows up, banks stand there holding extremely little capital in defense.

And that also means, effectively, that our banking sector is not allocating sufficient bank credit to those in the real economy who are in most need of it.

And so to sum it up: current regulators are betting more than ever our whole banking system on the bankers being able to pick the right assets… while at the same time distorting the picking of those assets. Sheer lunacy! We need to get rid of them urgently.