Tuesday, February 26, 2013

Children and grandchildren, the truth about your fathers and grandfathers who are bank regulators

Your fathers, or grandfathers who are bank regulators, actually thought that if banks were allowed to leverage more their equity with exposures to those perceived as absolutely safe, than for those perceived as risky, we would not have any more bank crises. 

And this they believed even though all bank crises in the world have resulted from excessive exposures to those perceived as “The Infallible” and never ever because of excessive exposures to “The Risky”. 

Sorry kids, I wish I had not to say this, but they were really stupid. For your sake, I hope it is not something genetically.

PS. If you think that I am being too severe with your fathers and grandfathers who are bank regulators, then think of all the fathers and grandfathers who are not bank regulators, and who will suffer seeing their children and grandchildren not finding a job, only because of senselessly risk-adverse regulations.

Sunday, February 24, 2013

My objection to “An Explanatory Note on the Basel II IRB Risk Weight Functions”, July 2005, Bank of International Settlements

The document referred to in the title describes how the Basel II risk-weights came about. I have two major concerns with what it states and one immense with what it ignores: 

First, it describe one important simplification needed in order to allow a practical implementation of a rating based capital allocation, namely that “The model should be portfolio invariant, i.e. the capital required for any given loan should only depend on the risk of that loan and must not depend on the portfolio it is added to…. . 

The simplification is justified with “A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules” by Michael B. Gordy a senior economist at the Board of Governors of the Federal Reserve System, October 22, 2002. 

And so it states “As a result the Revised Framework was calibrated to well diversified banks… If a bank failed at this, supervisors would have to take action under the supervisory review process” 

And that places an immense supervision burden on a body often not sufficiently equipped for it, and worse still, a body that had been sold a feeling that, with the rating based risk-weights, it had already solved the problem forever. 

Second it states: “Losses above expected levels are usually referred to as Unexpected Losses (UL) - institutions know they will occur now and then, but they cannot know in advance their timing or severity. Interest rates, including risk premia, charged on credit exposures may absorb some components of unexpected losses, but the market will not support prices sufficient to cover all unexpected losses. Capital is needed to cover the risks of such peak losses, and therefore it has a loss-absorbing function.” 

That is indeed correct, but that does not mean one can go ahead assuming that these risk premiums are covering zero of the unexpected losses, or that the market will “not support prices sufficient” the same over the whole range of perceived risks. In fact given basic bankers risk-aversion, I would make a case that where the markets do not support the prices correctly, is mostly for whatever is perceived as “absolutely safe”, and that, for the “risky”, it might overprice it instead.

Also if one must use credit rating information which is already available for the bankers to see, then instead of basing it on what the ratings indicate, one should base it on how bankers usually act when observing those ratings. Then they would have seen that bank crises never ever occur because of excessive exposures to "The Risky" but always from excessive exposures to "The Infallible".

Sincerely to use the expected as a proxy of the unexpected is as nutty as can be. The more safe an asset might seem the more room there is for bad unexpected events. The riskier an asset might seem the less the room for bad unexpected events.

And then finally, what the document completely ignores, is that the setting of differential risk-weights, by allowing banks to leverage risk and transaction cost adjusted margins immensely more for what is perceived as “absolutely safe”, introduces a very dangerous bias and distortion against what is considered as “risky”. 

And I just do not understand how that came to happen. Though banks do use risk-models to estimate appropriate capital levels, when looking for capital, they do not make separate share issues based on perceived risks, indeed, as all capital has usually to cover for all risks. 

In fact by allowing banks to hold much less capital against what is perceived as “safe” than against what is perceived as “risky”, regulators are in fact allowing for speculative profits, not on what is “risky” but on what is safe… and that turning the world upside down cannot be healthy. What about the efficient resource allocation function of our banks? With their risk weights the regulators are de facto telling us that those perceived as safe use bank credit more efficiently than those perceived as risky... and that we all know is not so.

And I must ask again: If banks are induced to make more profit on what is perceived as safe than on what is perceived as risky… then what is left for us… and for our orphans and widows?

Saturday, February 23, 2013

Boston Consulting Group, a consultant who does not dare to speak a truth that might hurt, is no real consultant.

Boston Consulting Group wrote a reasonably good paper about the need to finance the Next-Generation Companies, and which it presented at the World Economic Forum in Davos in 2013 

Unfortunately, the paper fails to identify that, courtesy of excessively sissy bank regulators, we now have capital requirements for banks which favor “The Infallible” and thereby discriminate “The Risky”, and which of course means favoring the past, those who have already made it, and therefore discriminating against the Next-Generation Companies. 

How come the Boston Consulting Company does not raise that issue? Would it be because doing so would reveal bank regulators for the fools they are

As I see it a consultant who does not dare to speak a truth that might hurt, is no real consultant.

A good consultant should always try to block group-think, not nurture it.

For those in blissful ignorance, this is what the Basel Committee’s Basel II decreed for our banks

We the members of the Basel Committee, as self-appointed guardians of your interests, knowing that banks want to maximize the returns on their equity, and wanting the banks to play it safer and not take risks, hereby ordain: 

Banks will still be allowed to lend to those perceived as “risky”, usually those not rated or those with not so good credit ratings, usually the small and medium sized businesses or entrepreneurs, against 8 percent in capital; meaning that banks are able to leverage their capital with the risk and cost of transaction margins of those exposures, 12.5 times to 1. 

But now, when lending to the safe or the absolutely-safe, the latter including AAA rated securities and so and so sovereigns like Greece, they will only need to hold 4 or 1.6 percent in capital respectively; meaning that banks will now be able to leverage their risk and cost of transaction margins of those exposures, 25 or 62.5 times to 1. (A jolly profitable proposition for playing it safe we would say) 

And finally, in the case of lending to sovereigns considered to be infallible, most often our bosses, at least in a formal sense, then banks need to hold no capital at all, and so there, as far as leverage concerns, the sky is the limit. 

Happy safe and huge bank equity returns!!! 

PS. Of course Basel II led the banks to create the excessive and dangerous large exposures to what was ex-ante considered as absolutely safe but that ex-post turns duo to be Potemkin ratings, and which caused the current crisis. Of course Basel II, and perhaps even more upcoming Basel III, stops the banks from lending to “The Risky”, those we most need to help us to get out of the crisis, and get our youngsters their jobs.

Friday, February 22, 2013

If bank regulators head east, when they should head west, is that a minor mistake?

All bank crises in the world has resulted from something perceived as safer that it really was, and no bank crisis ever from excessive exposures to what was perceived as risky when booked. 

And so therefore when the Basel Committee and the Financial Stability Board set up bank regulations known as Basel II and that as its pillar has capital requirements which are much lower for bank exposures to what is perceived as to “The Infallible” than for what is perceived as “The Risky”, then it would seem they are heading in the totally wrong direction. 

And so of course we got ourselves a traditional bank crisis because of excessive exposures to assets perceived as safe like AAA rated securities, sovereigns like Greece and Spanish real estate. 

And those regulations also cause that “The Risky”, those already discriminated against on account of that perception, end up paying even higher risk-premiums, getting even smaller loans and having to accept even harsher contract terms. 

And so of course making it more difficult for "The Risky", like small and medium businesses and entrepreneurs, we can not get our real economy going, so as to create the jobs we need, especially for our young. 

I have not been able to extract an answer on this from the regulators for many years now, and now they are threatening to make it even worse when, in Basel III, they are concocting some liquidity requirements also based on perceived risks. Can you please help me with that?

Monday, February 18, 2013

The absurd front and back door security of our banking system

Suppose you live in a house which has often been burglarized. It has two doors. One, your back door, faces a dark alley and has therefore many bolts and security latches. The other one, your front door, faces a well lit walkway in a friendly community, and so that even though it has a lock, it is often kept open. And absolutely all illegal entrances by the burglars have been through your front door, never ever through the back door. 

Now what would you say about a security consultant who then recommends you adding two pit bulls at your back door and placing a welcome doormat at your front door? Would you contract his services? I guess not. 

I say this because that is precisely what our bank regulators did with Basel II, by lowering the capital requirements for the banks when lending to “The Infallible”, those who enter by the front door, those truly dangerous when not really infallible; and thereby scaring away even more “The Risky”, those who enter through the back door, those who never pose a real danger, and those who are so useful for the  real economy.

The pillar of the Basel Committee and the Financial Stability Board regulations, capital requirements for banks based on perceived risk of assets already cleared for by means on interest rates, amounts of exposure and other terms, is therefore completely absurd. And now, with Basel III, with liquidity requirements also based on perceived risk, they want to close the back door and open the front door even more.

Even so the world still respects these utterly failed regulators so much that even an FT, which proudly declares a “Without fear and without favour” motto, dares not question their capabilities.

Could it really be that the silliness of these regulations exceed our society´s limits of imagination and so it has become trapped in the quagmire of a: “They can´t be so dumb, so what is it we do not understand?

Bank regulators fixed the game, bribed the players, and got us the crisis they paid for.

Before the current set of bank regulations, all borrowers could be treated equally good or bad by the bankers, though Mark Twain held there was a natural risk-adverseness among bankers that played out in a strong bias against those perceived as “risky”. 

But the Basel Committee for Banking Supervision, thinking it was doing its duty as a nanny, paid the bankers to treat those perceived as “safe” borrowers so much better than those perceived as “risky”. And this they did by allowing the bank to hold much less capital against the first, and thereby obtaining a much higher risk adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. 

And of course, the banks accumulated excessive exposures to what was ex-ante perceived as safe but that ex-post turned out to be very risky, against very little capital, and the crisis exploded. 

And of course, since these dumb regulations remain in place, banks do not finance those borrowers that find themselves on the margin of the real economy, like small businesses and entrepreneurs, and who are extremely important if we want to get out of the crisis. 

Poor us! How do we get rid of these crazy nannies?

Sunday, February 17, 2013

Do we need a witness protection program for European bank regulators?

Would Europe be in such troubles had their banks not purchased too many Potemkin rated securities, or lent too much to sovereigns like Greece, Spanish real estate or Irish banks? No way! 

Would the banks have done all that if they had been required by their regulators to hold as much capital for it than when lending to an ordinary unrated European citizen? No way! 

And so there can be no discussion of that those primarily responsible for all current hardship in Europe are the bank regulators who allowed it all. 

But they have all circled their wagons so that no one can get close to them asking for an explanation, and anyone of them willing to offer a mea culpa would clearly be labeled a traitor by his colleagues.

And if for instance all the European youth got hold of how these regulators, by discriminating against the risky and thereby favoring what is safe, are blocking their future, they better hide. 

And so we might need to offer a witness protection program to some regulators, in order to break this dark spell. Because break it we must. Otherwise Europe is toast. 

Would Mario Draghi be a taker?

Mario Draghi, you should not be the president of the European Central Bank.

Mr. Draghi, you are there fundamentally covering up, with other people´s money, your own mistakes, as one of the bank regulators who with so much hubris thought they could be the risk managers of the world; and thereto concocted those so stupid capital requirements for banks which are immensely lower for exposures to what is perceived as absolutely safe than for exposures to what is perceived as risky. 

That effectively castrated the banks which in Europe are of such extreme importance for allocating economic resources efficiently; and that effectively created the current crisis by pushing banks into excessive exposures to what you and your colleagues, trusting so naively the credit ratings, considered to be absolutely safe. 

Frankly, someone who has been able to authorize banks to invest in securities with an AAA to AA rating, or lend to Greece, holding only 1.6 per cent in capital, and thereby authorizing the banks to leverage their capital 62.5 to 1 for that kind of exposures to “The Infallible”, does not seem to have the qualifications needed to be the president of the ECB. 

Frankly, someone who at the same time required banks to hold 8 per cent in capital when lending to “The Risky”, and does not understand what that implies in terms of discriminating against those actors who though perceived as risky, play such a fundamental role on the margins of the real economy, like our small businesses and entrepreneurs, does not seem to have the qualifications needed to be the president of the ECB. 

Wherever and whenever, I dare you to in public answer some very simple questions that I have for years now repeated over and over again. Just in case you want to plead ignorance on it, here you can find some of the material that would be in the exam. Be my guest. 

And just for your information I am not someone crazy or unstable. I am a professional with a long and successful experience, but at the same time very anxious about the Western World in which my grandchildren will have to live in… and here but a sample of what I warned you all about, but that the banks regulators' little mutual admiration club preferred to ignore.

And just for your information I am taking this for me quite uncomfortable route, only after in vain having tried to capture your attention so as to help you correct your mistakes. You probably hoped that by just ignoring me, the problems would go away. Sorry, not to happen. 

Why me, you might ask. Because you Mr. Draghi, having been the chairman of the Financial Stability Board for so many years, best represents the promotion of the failed; since many other of your colleagues have only been given a chance to have a go at it again with Basel III, something which of course is also sheer lunacy. But, if there is someone else more deserving of my criticism, please advice, I have no problems. 

Am I not aware of how delicate the situation of Europe is so as to make this type of public letter? Yes, of course I am, but I am also absolutely convinced that if Europe does not rid itself of this loony discrimination against “The Risky”, those who helped it become what it is, then the Europe we love will sadly be gone forever. And you are not authorized to do that!

Per Kurowski

Saturday, February 16, 2013

Our current bank regulators are dangerous fools.

Bank regulators foolishly allow banks to hold much less capital against assets which are perceived as “safe” than when holding assets perceived as “risky”. 

That means that bank regulators foolishly allow banks to leverage their capital many times more when holding assets which are perceived as “safe” than when holding assets perceived as “risky”. 

And that means that bank regulators foolishly allow banks to earn a much higher expected risk-adjusted return on equity when holding assets perceived as “safe” than when holding assets perceived as “risky”. 

And I say “foolishly” because with that bank regulators introduce a distortion that makes it absolutely impossible for banks to perform their vital social function of allocating resources efficiently. 

And I say “foolishly” because that guarantees that when something ex-ante perceived as safe, ex post turns out to be risky, bank exposures to it will be huge, and the bank capital to cover for it totally insufficient. 

And I hold our current bank regulators to be dangerous fools, because they don´t even understand the harm their capital requirements based on perceived risk of Basel II does to our banking system and that it caused the current crisis; and because they now want to dig us even deeper down into the hole with Basel III adding liquidity requirements which are also based on perceived risk. 

A bank is there to take intelligent risks on behalf of the risk-adverse society, and not to be treated as just another widow or orphan by some dumb overanxious nannies.

A perfect depiction of our bank regulators… looking out in the same direction of bankers for what is perceived as risky, forgetting that in banking, as in so much other, what is really risky is what is considered absolutely safe. (Thanks "Learning from dogs" for the heads up for the photo)

Friday, February 15, 2013

How many young in Europe are unemployed only because of YOU bank regulators? MILLIONS!

YOU, European bank regulators decided that banks were allowed to hold extremely little capital when lending to those ex ante perceived as absolutely not risky, “The Infallible”, and this discriminates de facto horrendously against the bank borrowings of those perceived as “The Risky”, the unrated or not superbly rated, the small and medium businesses and entrepreneurs.

And so YOU, with that sapped the vitality supplied by those actors who, operating on the margins of the real economy, makes us move forward, so that we do not stall and fall. 

And so YOU, European bank regulators, have you any idea of how many of our young ones are without a job, and without expectations of a job, and therefore without expectations of being able to form a family only because of your regulations? 

I tell you: “Millions!” Shame on YOU! 

Sincerely if the millions of unemployed European youth really came to know about your stupidity which is blocking so much of their future, I would not like to be in your shoes 

It is high time for YOU, the Basel Committee and the Financial Stability Board, to lower that baby-boomer keep-us-safe-for-now-and-après-nous-le-deluge flag you fly. Have you all forgotten that Europe did not become what it is by avoiding risks?

PS. And by the way it was YOU who caused the current crisis by giving banks so excessive incentives to build up excessive exposures to your ex-ante “The Infallible” but that nonetheless failed you ex-post, like AAA rated securities, Spanish real estate, Greece and much more of that sort. 

PS. You fill your mouths with growing concerns about the increasing disparage between the have and the have-nots. Don’t YOU understand that one fundamental driver of that are your regulations which favor those already favored so much by markets and banks, “The Infallible”, and thereby discriminate against “The Risky”, those already discriminated against by markets and banks?

Tuesday, February 12, 2013

Financial Stability Board, and Basel Committee, stop insulting our intelligence

The Financial Stability Board in its Peer Review on Risk Governance of February 12 states: 

“The recent global financial crisis exposed a number of risk governance weaknesses in major financial institutions, relating to the roles and responsibilities of corporate boards of directors (the “board”), the firm-wide risk management function, and the independent assessment of risk governance. Without the appropriate checks and balances provided by the board and these functions, a culture of excessive risk-taking and leverage was allowed to permeate in many of these firms.” 

Have these regulators no shame? They know perfectly well that it was they who intruded on the risk management functions of banks by imposing distorting differentiated capital requirements based on perceived risk, and authorized the excessive leverage to what was perceived as absolutely not risky, like to AAA to AA rated securities and sovereigns like Greece. 

The review sets out among its recommendations: “National authorities should strengthen their regulatory and supervisory guidance for financial institutions and devote adequate resources to assess the effectiveness of risk governance frameworks.” 

Forget it! Our problem is not with our national authorities, our problem is with YOU, Financial Stability Board and Basel Committee. 

Regulators go home and please stop insulting our intelligence, as is you’ve done enough damage.

Sunday, February 10, 2013

All really conscientious bank board directors should resign immediately, because of their regulators

All board directors should be the-buck-stops-here responsible for a bank’s risk management. 

But what if some external actor, in this case their own regulator, messed around and imposed his own capital allocation formulas, based on perceived risks, like indeed the regulator has done with Basel II, and wants to do even more with Basel III, when he now also wants to add liquidity requirements based on perceived risks. 

Should not then all really conscientious bank board directors immediately resign, telling the regulators “You have made our mission impossible”? 

I think they should! If they take their bank to where the regulator wants them to go with his capital requirements, and where therefore they have to go if they want their bank to remain competitive, they, and their competitors alike, are all doomed to mess up the whole real economy of the world, by lending too much to “The Infallible” and too little to “The Risky” 

The capital and liquidity requirements for banks based on perceived risk, imposed by bank regulators, is such a fundamental distortion of the markets that no really responsible bank director should accept it.

PS. I extract the following from one official Bank Director’s Responsibility statement 

Primary Role (among other): To act as trustees for all of the Bank’s constituencies. 

Duties and Responsibilities (among other): Provide that risk management policies (broadly defined) and internal controls are in place and functioning, and provide a balance between the risks and benefits of the Bank’s activities. 

Each Director should exhibit:

Integrity and Accountability: Character is the primary consideration in evaluating any Director. Directors must have high ethical standards and integrity in their personal and professional dealings. Directors must be willing to act on and remain accountable for their Boardroom decisions. 

Informed Judgment: A Director should be able to provide wise, thoughtful counsel on a wide range of issues. Directors should possess high intelligence and wisdom, and be able to apply it to decision making. Directors should be able to comprehend new concepts quickly. 

Financial Literacy: Directors should be financially literate. Directors should know how to read a financial statement and understand financial ratios. Directors should have a working familiarity with basic finance and accounting practices. 

Mature Confidence: Directors should approach others in a self-assured, responsible and supportive manner. Directors should be able to raise tough questions in a manner that encourages open discussions. Directors should be inquisitive and curious and ask questions of management.

Tuesday, February 5, 2013

Good morning, Your Honor. May I approach the bench, to do a sort of defense of Standard and Poor’s, pro bono?

There are many reports which indicate that the US department of justice is expected to file a civil lawsuit against Standard & Poor’s for the issuing of overly rosy credit ratings with respect of some collateralized debt obligations. 

If I was allowed to defend S&P, pro bono, without of course implying that any outright illegalities committed by it should not be punished, I would state the following: 

Your honor: Credit rating agencies have been around for a long time issuance opinions which are certainly quite often very wrong, by being very rosy or by painting a too dark picture. Doing the first investors and lenders might lose out in favor of borrowers, doing the latter borrowers might lose out in favor of investors or lenders. C’est la vie. 

But one thing I am absolutely sure of is that, had the bank regulators not assigned so much importance and so much credibility to some human fallible rating agencies, like by allowing banks to hold AAA to AA rated securities against only 1.6 percent in capital, and which translates into a mindboggling approved leverage of bank capital of 62.5 to 1 times, we would not be standing here. 

There would have not been the kind of pressures exerted on credit rating agencies to produce these AAA to AA ratings, and if produced there would not have been the same outrageous demand for these securities, and the consequences would not have been something to write home about. 

And so, if you ask me, the credit rating agencies broke the window, but the bank regulators, placed the stone in their hands. 

Your honor, in evidence of what I am saying I introduce here a letter I wrote in January 2003, and which was published by the Financial Times. It states: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds” 

Also, in April 2003, in a formal written statement delivered as an Executive Director of the World Bank I held: “Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on a limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.” 

And in May 2003 in an Op-Ed I also wrote “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators we find it so strange that the Basel Committee delegate, without any protest, so much responsibility in the hand of so very few and so very fallible credit rating agencies” 

Your honor, unfortunately the bank regulators did not want to listen, just as they still do not want to do. If you find Standard and Poor’s guilty of misdoings, something which you might do, I beg of you not to ignore those who unwittingly, but with extreme arrogance, set us up to all this disaster.

Monday, February 4, 2013

Only consistence can create a dangerous systemic risk, inconsistency does not!

Silly, silly, silly! Here the regulators once again enter into an exercise of futile navel gazing. Why should regulators be concerned with whether the risk weighting of assets is consistent or not? 

Their problem is not if any risk-weighing is correct, or consistent, their problem is when the risk-weighing is incorrect and what to do about the consequences. 

Let us instead pray for tremendous amounts of inconsistency since that is the only thing that can save us from building up a systemic risk that will bring all the banks down, simultaneously.

A free market is not made up by consistencies, but by millions of inconsistencies!

My comments for IMF's revision of its "Code of Good Practices on Fiscal Transparency"

Washington, February 4, 2013

International Monetary Fund

Dear Sirs,

You hold that “Fiscal transparency – defined as the clarity, reliability, timeliness, and relevance of public fiscal reporting and the openness to the public of government’s fiscal policy-making process - is a critical element of effective fiscal policymaking and risk management. Without comprehensive, reliable and timely fiscal information, governments cannot understand the fiscal risks they face or make good budget decisions. If citizens don’t have access to this information, they cannot hold governments accountable for those decisions.”

“Does the Code adequately address all of the most important aspects of fiscal transparency? What practices should be dropped? What practices should be added? Which practices should be updated to reflect recent developments in fiscal reporting standards and practices or the lessons learned from the crisis?”

In this respect I would submit that any “Good Practice on Fiscal Transparency” should also look to identify the presence of any hidden subsidies and or taxes that might affect government’s fiscal affairs, and, if possible, provide estimates as to their significance.

Specifically I refer to the fact that current bank regulations require banks to hold much more capital against assets perceived as risky, like loans to small businesses and entrepreneurs, than for assets perceived as “absolutely safe”, like loans to “infallible sovereigns”.

This translates into that a bank can leverage its equity man y time more the dollars paid by “the infallible sovereign” in risk-adjusted interests, than the same risk-adjusted dollars paid by “the risky”.

That translates directly into a regulatory subsidy of the government’s bank borrowings, paid by “the risky bank borrowers” by means of higher interest rates, and paid by the society at large by means of the opportunity cost that might be present in allowing the public sector to borrow much easier and much cheaper than the “risky” private sector, than what would have been the case in the absence of this regulations.

That translates into giving banks incentives to dangerously overpopulated safe-havens, and equally dangerous for the real economy, under explore some more risky but perhaps more productive bays; something which of course introduces a distortion that makes it impossible for banks to perform their utterly important function of allocating economic resources efficiently.

That also translates into that one of the most important theoretical rates there is in finance, the risk-free rate, usually approximated by the rate to the “most infallible sovereign” is a subsidized rate and which of course makes it impossible for the government and the markets, to know where the real risk free rate is. In other words one of the fundamental instruments needed to navigate the economy gives wrong readings.

Since there are also sovereigns who are deemed not so infallible and so against their borrowings banks are required to hold more capital, this also translates into an effective global capital control that helps to channel funds away from what is ex-ante perceived as risky into what is ex ante perceived as infallible. In other words these capital controls only help to increase the existing gaps between “the risky developing” and the “infallible developed”.

In conclusion I ask of the IMF to try to estimate all the fiscal effects of what is described above, or to respond publicly why in IMF’s opinion my arguments might be wrong, or plain irrelevant.


Per Kurowski

A former Executive Director at the World Bank (2002-2004)

Saturday, February 2, 2013

Damn you bank regulators

When I see this hopeful Spanish youth doing the best it can to hold their heads up high, and at the same time I know we have bank regulations that go against job creation, I am so sad and so mad.

The current capital requirements for banks, more capital when the perceived risk of the bank asset is higher and less capital when the perceived risk of the bank asset is lower, sounds so logical, but is in fact so dumb. 

First, never ever have bank crises resulted from excessive bank exposures to “The Risky” they have always resulted from excessive exposures to what was believed to be “The Infallible”

Second, these capital requirements discriminates against “The Risky”, those actors like small businesses and entrepreneurs and who try to create a living-room for themselves on the margin of the real economy, and who are one of the most important sources of the next generation of job.

And the regulators are completely unwilling to accept they are so profoundly mistaken and be held accountable for it. Damn you bank regulators!

Friday, February 1, 2013

Basel Committee please, no more Mumbo-Jumbo, with Basel III you are going to hoo-doo us, even more than with Basel II

Basel Committee and Financial Stability Board: “Beware, beware, walk with care, care for what you do, or Mumbo-Jumbo is going to hoo-doo you, or Mumbo-Jumbo is going to hoo-doo you, boom le boom le boom le boom!”… and hoo-doo our banks, and hoo-doo us. Please we are NOT expendable!

And in case you wonder what Mumbo-Jumbo I refer to, please have a look at: 

An Explanatory Note on the Basel II IRB Risk Weight Functions”, July 2005, Bank of International Settlements 

A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules” by Michael B. Gordy a senior economist at the Board of Governors of the Federal Reserve System, October 22, 2002. 

And then consider that in those papers, which refer to the risk-weights that should determine different capital requirements for banks, there is not one word that shows any awareness of the fact that: if you allow a bank to leverage its equity more when lending to “The Infallible” than when lending to “The Risky”, you are introducing and odious discrimination and a completely senseless distortion that will make it impossible for banks to help the society to allocate efficiently economic resources.

PS. Here you can read more about what that mumbo jumbo entails