No! Bank regulators, much more than they deregulated, just regulated amazingly bad.

Here is an interview by Econ Focus of Richmond Fed with Mark Gertler, which repeats the falsehood of bank regulators believing too much in the market.

Gertler: The biggest mistakes probably involved too much deregulation.

Econ Focus: What do you think is the best explanation for the policies that were pursued? 

Gertler: At the time, I think it was partly unbridled belief in the market — that financial markets are competitive markets, and they ought to function well, not taking into account that any individual is just concerned about his or her welfare, not about the market as a whole or the exposure of the market as v a whole. 

I am sorry. That is simply not true. 

Anyone with any reasonable belief in the market being able to allocate credit adequately in the economy… would never ever have interfered by means of setting the capital requirements for banks based on risks which were already cleared for by banks. 

That resulted in banks earning much higher risk-adjusted returns on equity when financing what is ex ante perceived as “safe”, than when financing what is ex ante perceived as “risky”, something which of course distorts all common sense out of bank credit allocation.

For instance, Basel II had it that if a European bank made a loan to a medium and small business, an entrepreneur or a start up, then it needed to hold 8 percent in capital, a leverage of 12.5 to 1, but, if it purchased AAA rated securities, then it needed to hold only 1.6 percent in capital, a leverage of 62.5 to 1. And that of course had Europe buying the securitized subprime mortgages like if there was no tomorrow… and so did the investment banks when authorized by the SEC to follow the Basel rules.

In other words... bank regulators did not believe in the markets... they believed in themselves being the Masters of the Universe, capable of managing risks for the whole banking world.

In other words... bank regulators instead of concerning themselves with any "unexpected losses", which is what they should do, decided to also manage the expected losses.

In other words... bank regulators were just amazingly bad. In terms of Bill Easterly... God save us from the tyranny of experts.

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

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

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

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

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

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

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

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

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

This financial crisis did not disprove the efficient market hypothesis.

One of the most mentioned aspects about the current bank crisis is that in much it was a consequence of Alan Greenspan believing blindly in the efficient markets hypothesis, a hypothesis that became so thoroughly discredited.

Sorry… what efficient markets? With respect to the allocation of bank credit, the markets were completely distorted by the risk-weighted capital requirements, and so that hypothesis had no chance to be proven or disproven.

The capital requirements were and are much lower for what is perceived as absolutely safe, than for what is perceived as risky, and so the risk-adjusted returns on bank equity are much higher on assets perceived as absolutely safe than on assets perceived as safe.

In terms of the equity markets this would be something similar to the government multiplying the profits of investors, by paying them bonuses or similar subsidies, whenever they invested in shares with low volatility and not in shares with high volatility. Do you really think that would allow for an efficient market hypothesis to work free at its leisure?

I am not saying that the markets behave efficiently all the time but that, this time at least, it was clearly not the fault of markets, but the fault of dumb regulators.

PS. These comments were inspired by reading Chapter 1, "Primordial Seeds" in James Owen Weatherall's "The Physics of Wall Street" and which contains a fascinating description of the origins of the hypothesis and of its first and almost forgotten originator Louis Bachelier.

PS. I should acknowledge Tim Harford's arguments that though not the same do point in the same direction.

Would you buy a used bank regulation, Basel III, from those who previously sold you the lemon of Basel II?

A bank regulation like Basel II, based on capital requirements that are much lower for assets perceived ex ante as “absolutely safe” than for assets perceived as “risky” is, in terms of how bank regulations come, a real lemon.

Suffice to say that the current crisis, just like all the other bank crises in history, has resulted from excessive bank exposures to what was ex ante erroneously perceived as “absolutely safe”, like AAA rated securities, housing sector and sovereigns like Greece, and not from what was ex ante perceived as “risky”, like medium and small businesses, entrepreneurs and start-ups.

And of course these regulations also distort the allocation of bank credit to the real economy, something which is dearly being payed by all those young unemployed who could turn into a Lost Generation

The problem though is that the same men who are to blame for the Basel II lemon are still in charge and now working on Basel III, applying the same principles… though in a more complex and even less understandable way.

Below just four of them

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

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

Jaime Caruana, the former chairman of the Basel Committee, now promoted to General Manager of the Bank of International Settlements.

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

Damn you, thick as a brick bank regulators.

Even though never ever have a bank crisis resulted from excessive exposures to what is perceived as “risky”, as these have always, no exceptions, resulted from excessive exposures to what has erroneously perceived as “absolutely safe”, our thick as a brick regulators require banks to hold immensely much more capital when lending to the medium and small businesses, the entrepreneurs and start-ups, than when lending to the “infallible sovereigns”, the AAAristocracy or the housing sector… and so of course no one is out there financing the creation of the jobs our young ones so urgently need. Damn you regulators!

They, the future, they do not need sissy risk adverse capital requirements based on credit ratings, they need capital requirements based on job creating ratings, and on planet earth sustainability ratings.

They do not need a bubble in our safe past... they need bubbles in their risky future!

Who is Mark Carney to talk about providing equal opportunity to all citizens?

We read Mark Carney the governor of the Bank of England saying “there is growing evidence that relative equality is good for growth. At a minimum, few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined”

Who is he to talk about this? As a chairman of the Financial Stability Board, Mark Carney has approved for years risk-weighted capital requirements for banks, which discriminate against bank lending to “the risky”, those already discriminated against, precisely because they are perceived as “risky”, and favors bank lending to the “absolutely safe”, those already favored, precisely because they are perceived as “absolutely safe”.

Two simple questions on Basel II and III to Stefan Ingves, Mark Carney, Mario Draghi and other bank regulators.

Question 1: Do you really think that risk-weighted capital requirements for banks, which allow banks to earn higher risk-adjusted returns on equity when lending to "the safe" than when lending to "the risky", do not dangerously distort the allocation of bank credit to the real economy?

Question 2: If no bank crisis ever has resulted from excessive bank exposures to what was ex ante perceived as "risky", and these have always resulted from too large exposures to what was ex ante perceived as "absolutely safe", why do you require a bank to hold more capital when lending to "the risky" than when lending to the "absolutely safe"?

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.