How unfair, bankers just followed orders, and they are now being trashed

The bankers obediently went to where the regulators wanted them to go, where the regulators allowed them to leverage bank equity 60 times and more, like when buying AAA rated securities backed with mortgages to the subprime sector, or lending to for instance Greece, Portugal, Italy and Spain; and, likewise, obediently stayed away from those risky small businesses and entrepreneurs, where the regulators only allowed them to leverage bank equity 12 times. 

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

We golfers can count ourselves lucky golf is not regulated by a Basel Committee

Current bank regulations:

Those perceived as safe, who therefore have easier access to credit, lower bank capital requirements. 

Those perceived as risky, who therefore have less access to credit, higher bank capital requirements. 

"I play with friends, but we don't play friendly games." Ben Hogan 

In reference to the recent published history of the Basel Committee of Banking Supervision (early years 1974-1997) by Charles Goodhart, I must say that we golf players, who enjoy a handicap system that allows us bad players to play against the good ones, should feel very lucky that system did not fall in the hands of something like a Basel Committee of Golf Supervision. 

Had that happened and had that Committee followed the same mentality as the BCBS, we could have ended up with a system that allows good players extra strokes and takes away strokes from the bad, which, in essence is what the current capital requirements for banks based on ex-ante perceived risk do. 

The end result of such a system would be to little by little weed out all bad players until only the best one was left standing, victorious, but with no friend to play with.

Likewise current bank regulations are little by little eliminating the access to bank credit to those perceived as “risky” and concentrating it in lesser and lesser borrowers perceived as not-risky. 

In this respect, having weeded out all “risky” small businesses and entrepreneurs and now doing the same to sovereigns, like falling domino pieces, the US dollar might end up as the last absolute-risk-free-borrower-standing, but what’s the use of that if he then has no friend to play an "unfriendly" game with?

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

'Pour sunlight on lousy bank regulations' says ex World Bank director

http://www.citywire.co.uk/global/pour-sunlight-on-lousy-bank-regulations-says-ex-world-bank-director/a535281

The egos of bank regulators that don’t want to be hurt stand in the way of a solution to Europe, and others.

In the financial sector the truly dangerous systemic risks reside only in the DNA of what is perceived as having a low risk. That is what our bank regulators failed to see, and their hurt egos now stand in the way of finding solutions to the European crisis, as they refuse to cut off the gas that has caused and is stoking the fires.

The capital requirements for banks based on perceived risk, together with the extreme scarcity of bank capital, is forcing the banks out of anything that is becoming perceived as more risky and into what for the time being is still perceived as less risky.

That is making the financing of what is already perceived as risky so much more difficult, while at the same time creating the excessive exposures to the last standing absolutely-not-risky borrower, who will then turn into the mother of all risks.

How can we make them swallow their pride and act before it is too late?

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

Current bank regulations cause criminal harm to the economies.

Our banks must currently submit to regulatory capital requirements that are based on the ex-ante perceived risk of borrowers. The higher that perceived risk, the higher the capital, and vice-versa. 

This amounts to an odious and arbitrary regulatory discrimination against those borrowers perceived as “risky” and which serves absolutely no purpose and on the contrary causes serious damages to the world economy. These regulations have both caused the current crisis and are hindering the recovery, and they need to be denounced. 

Those borrowers that are considered as “risky”, like the small businesses and entrepreneurs, already pay the cost for that in the markets, primarily by means of having to pay higher interest rates and less access to bank credit. 

Those borrowers that are considered as “not-risky”, like the triple-A rated and “strong” sovereigns, already receive the benefits from that, primarily by means of having to pay lower interest rates and having more and easier access to bank credit. 

Allowing then the banks to leverage more their capital and thereby earn more risk-adjusted interest rates when lending to those perceived as “not-risky”, imposes on those perceived as “risky” the need to make up the difference in the opportunity for returns on equity to the banks. 

Even those perceived ex-ante as “not-risky” can be hurt, as is the case of Greece, where obviously the fact that banks could lend to it against only 1.6 percent in capital, created artificially favorable conditions for an excessive build up of debt. 

That those capital requirements beside the damage they cause serve absolutely no purpose can easily be ascertain by the fact that never ever has bank lending to those perceived ex-ante as “risky” originated a bank crisis.

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

Lord Adair Turner on the Euro

Lord Adair Turner recently said “the thing that has gone wrong is the way we've encouraged Italian banks to hold to Italian debt” 

And so much more with their outright stupid capital requirements for banks based on perceived risks. These drove the banks to excessive exposure to “no-risk-land”, that land which as an example included the AAA rated securities and Greece, precisely the land that they, as regulators, should now is where all the excessive exposures and unpleasant surprises and systemic bank crises occur, while at the same time driving away the banks from helping out those in “risk-land”, where all the small businesses and entrepreneurs live, and in which never ever has a bank crises occurred. 

How much in extra interest rates, or in less access to credit, have the job creating small UK businesses and entrepreneurs have had to pay over the years, just because of Lord Turner and his chums’ regulatory nanny like anti-perceived-risk bias 

And here he is still “not advocating any deviation from the path set by Basel” 

Still I guess we can count ourselves lucky that Lord Turner is not also in charge of the golf handicap system, because if so, he would long ago killed that popular sport by allowing the good players like you more strokes, while taking strokes away from bad players like me.

PS. If you allow here´s a video that explains part of the craziness of our bank regulations http://bit.ly/mQIHoi

If only those of Occupy Wall Street knew

Just think about what those in Wall Street could be saying for if they really knew what they were talking about… Then they could for instance be asking for capital requirements for banks based on job creation ratings, because, if as tax payers we are to be the ultimate pick-uppers of any bank crisis, then we should at least be certain that the purpose of the banks is acceptable to us. 

Right now, the only purpose for the banks that the regulators have de-facto defined, by means of some ridiculous low capital requirements when lending to what is ex-ante perceived as not risky, and which allows for immensely high leverage of bank equity, is for the banks to make huge profits… and that, as purposes come, seems both vulgar and dumb, to say the least.

(Dumb because never ever do systemic bank crises occur as a result of excessive exposures to what is perceived as “risky”, these only result from excessive exposures to what is ex-ante perceived as “not-risky”, which is in fact the only perception that has the ability to generate huge unpleasant surprises.)

(Unfortunately there are many comfortable pseudo-truths about this crisis being pushed by various agendas, and so that the real truth, and that would be so embarrassing for the regulators, is taking a long time to come out.)

If you allow me here is a video explaining current regulatory madness it in an apolitical red and blue! http://bit.ly/mQIHoi

Should not Basel bank regulators have at least a B.A. in regulations?

I am just a humble MBA and which is why even though I more than almost anyone warned publicly about that the current financial crisis was doomed to happen as a result of Basel II, I do not get invited to explain my arguments at all those seminars at the World Bank, IMF and other high places, where so many the Monday morning quarterbacks PhDs get to be invited to speak, year after year,… but that’s ok, c’est la vie… or at least c’est la vie moderne. 

That said I ask though, should not bank regulators, like those in the Basel Committee at least be required to have a B.A. in regulations before going global with their occurrences? Or is there such a thing like a Master or a PhD in regulations? 

I say this because the current bank regulators did not behave like sensible and prudent regulators. Let me give you just but three of the so many examples: 

Should not bank regulators be more concerned about credit ratings being wrong than being correct? Of course they should, but the current bank regulators construed their regulations around capital requirements for banks based on the ex-ante perceived risks being correct. 

Should not bank regulators be more concerned about how bankers react to the ex-ante perceived risks? Of course they should, but the current bank regulators construed their regulations around their own reactions to ex-ante perceived risks. 

Should not bank regulators know that the only bank exposures that can grow so excessively as to generate a systemic crisis, the only ones able to generate huge unpleasant surprises, are the exposures to what is ex-ante perceived as “not-risky”? Of course they should!

In short, we do not need regulators who substitutes for bank and financial experts, we need regulators who complement bank and financial experts.

Here is a video that explains a small portion of the craziness of our current bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Where were the Universities when global bank regulations were designed?

There can be little doubt about that banks are one of the most important actors in the financial system, perhaps even the most important. By means of the Basel Accord of 1988, a proposal in June 1999 for a new capital adequacy framework, and the release of Basel II on 26 June 2004, more and more banks around the world were set to follow the same global regulations… and this is clearly impacting the area of finance, in many ways, more and more each day. 

That said, because of some strange and inexplicable reasons, the issue of bank regulations has been basically ignored by our universities, and most, or perhaps even all of the MBAs, graduate without the faintest idea about the existence of capital requirements for banks that distort immensely the flows of financial resources. 

Why is that? Why do they consider so often in the study material other distortions like tax deductibility for the service of debt but not for equity, and not this regulatory distortion? Had they´ve done so, then perhaps the academicians would have long ago denounced the outright stupidities that, courtesy of the Basel Committee for Banking Supervision, have been introduced in the current bank regulations. Had the Universities taken an interest in this matter we most probably would not be suffering the current crisis, at least not in its current systemic form.

Here is a video that explains a small portion of the craziness of our current bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

The Ph.D. dissertation on Basel II Bank Regulations and their capital requirements for banks that I would like to do.

In November 1999 in an Op-Ed in the Daily Journal of Caracas 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 the collapse, of the only remaining bank in the world” And indeed, in 2007-08, one Big Bang occurred… in my opinion as a direct result of Basel II. 

I would now like to do a Ph.D. dissertation on the subject of how the capital requirements for banks of Basel II and which based on the regulators’ fixation with the ex-ante perceived risks of default, introduced serious distortions in the financial markets that caused the current bank and financial crisis. 

Abstract 

Banks lend to clients adjusting the interest rates they charge, the amounts they lend, the duration of the loans, and the scrutiny they give the borrowers, to what they perceived is the risk of non-payment, a perception which obviously includes the information provided by the credit rating agencies. 

But when bank regulators introduced capital requirements for banks that were also based on the ex-ante perceived risk of default, these allowed the banks to hold much less equity when lending to those perceived as “not-risky” than when lending to the “risky”. 

That resulted in that banks were then allowed to leverage their equity much more with the risk-adjusted interest rates when lending to the “not-risky” than what they can do when lending to the “risky”. 

And that in its turn resulted in that banks could earn much higher returns on their equity, ROE, when lending to the “not-risky”, like the “solid” sovereigns and triple-A rated private borrowers, than when lending to the “risky”, like the not-so-solid sovereigns, small businesses and entrepreneurs; and or, that the interest spread between the “not-risky” and the “risky” widened considerably. The “not-risky” are charged lower interest rates than what they would be charged in the market absent these regulations, and, vice-versa, the “risky” are charged higher interest rates than what would otherwise been the case. 

These capital requirements do nothing to reduce the risks of a bank crisis, as these have always occurred because of excessive bank exposure to what had erroneously been perceived ex-ante as not risky; while at the same time they dangerously discriminate against some of the most important and dynamic participants in an economy. 

In this respect these capital requirements stimulated the creation of excessive bank exposures to sovereigns and triple-A rated, that which detonated the crisis; and they are also, by making it harder for small businesses and entrepreneurs to access bank credit at competitive rates, hindering the economy from getting out of the crisis. 

The above thesis could be demonstrated through research analyzing how the interest rate spreads between bank exposures to the “not- risky” and the “risky”, the leverage of the banks and the ROE has responded to the changes in the capital requirements. 

Some capital requirements for banks that discriminated for risk were already in existence as a result of Basel I, but the most extensive use of it came with Basel II, which was approved by the G10 countries in June of 2004. Therefore analyzing and comparing in some detail the two years of banking previous to June 2004 with the two years of banking thereafter should yield quite conclusive evidence as to who are to blame. 

Had the regulators not with a certain degree of hubris assumed the role of risk-managers for the world, arbitrarily toying around with their risk-weights, then quite probably another type of crisis could have ensued, as a result of many existing macro-economic disequilibrium, but none as severe, systemic and destructive as the current one. Just for a starter the demand for AAA rated securities backed by mortgages awarded to the subprime sector, would not have been a fraction of what it ended up to be. Just for a follow up, European banks would never ever have loaded up so much on the sovereign debt of Greece.

Now what I need to find is the university and the professors willing to give my thesis a chance, hopefully close to Washington D.C. where I currently reside, though these days I guess much of it could be done through the web too. 

Is there anyone out there willing to lend me their support?

PS. If you allow me here is a video that explains a small part of the craziness of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi